Costain enjoying 4.5% civils margin thanks to 50:50 savings split

Costain’s civil engineering turnover of £620m produced a £28m profit last year – which represents a sparkling margin of 4.5%, with 1% of this coming from profit sharing with clients on projects that came in at less than the budgeted figure.

Announcing the group's annual results today, chief executive Andrew Wyllie said: “These are enlightened clients. They are happy with a 50:50 split because we share mutual benefits.

“Yes I like this way of working, absolutely, and importantly so do our people. It means you can invest in innovation. It’s far removed from the traditional model of arguing. We’re not in that place.

“You can’t just pitch up and say to a blue-chip client ‘hey use me because I’m cheap’

“Costain is active on nuclear sites, on the London ring main, and on tunnels on the M25. The important thing is that clients in nuclear, water and highways see that we have teams who know that they are talking about.

“It’s that sort of reputation hat has got us contracts for two underground gas storage projects in Cheshire.”

Last year Costain lifted its number of employees by 200.

“We’re expecting turnover to grow again in 2009 and we are recruiting now,” said Wyllie. “I expect a net increase in staff numbers in 2009 and we always have room for talented project teams.”

With so much woe elsewhere, Costain is enjoying a rise in the quality of applicants who come knocking on its door looking for work.

“It’s higher than it was a year ago,” he reports. “If you want to develop your career then you want to go on the big projects – and that’s the territory we operate in.”

With Galliford Try’s construction division looking towards a neutral pay award this time round and with Carillion having just implemented a 2% rise for 2009, where is Costain heading on wages?

“We’ve not made a final decision on that as yet,” said Wyllie. “We’ve got to review that.”

Might it go down? Wyllie replied: “No, it won’t be down.”

During 2007 Costain raised £60m in a rights issue.

The reason was that the group’s strategy had been to focus on blue-chip clients, to large organisations looking to work with fewer contractors. “As a result we needed to strengthen the balance sheet,” explained Wyllie.

“We needed more financial horsepower to take Costain forward, so we went to the market before it was fashionable to do so.

“We couldn’t allow our bonding capacity to be a restraint on growth.”

The result is that Costain is currently carrying a £300m bonding line and today that sum is 50% utilised.

“We have £150m of bonds out so we could still double the size of the business,” said Wyllie.

“We are encouraged as both the banks and the bonding sector are supportive – we can report no change in our covenants and no change in our fee structure.

“We are turning work away. Every two weeks some of our board directors meet up to assess bid opportunities and there are more possibilities than we have resources.”

Looking ahead, Wyllie envisages Costain lifting its future presence in waste, energy, infrastructure and water.

 “We have the scale to win work,” he said. “Over the next 12-18 months opportunities will present themselves. We are looking to add new clients. Basically we look to further organic growth but also with add-ons that bring us new skills and project teams.

“You could see bolt-on acquisitions, yes, but don’t forget that Costain is making good double-digit growth organically, so we’re not required to do anything by way of acquisitions.”

Having cut the supply chain from 18,000 to 3,000, Wyllie recently been strengthening Costain’s links with the top 100 of this number.

On the other side of the coin, the bottom 500 of the group’s suppliers could find themselves put adrift in the course of the next year.