Profitability of large commercial construction companies in Australia

Increased competitiveness in the Australian building and construction industry has led to reduced profits for builders particularly for tier 1 builders offering essentially undifferentiated offerings. An analysis of the profitability of a sample of large commercial builders based in Victoria have confirmed that net profit margins for these companies are 2 and 3 percentage points of total revenues – wafer thin. The aims of this paper are to characterise the profitability of these commercial builders by examining a range of profitability measures, and to investigate this loss of value across the construction supply chain. The findings indicate that the average net profit margin has nearly halved from 3.2% in 2006 to 1.7% in 2015. Companies with large revenues, those exceeding $500 million annually, exhibit a generally lower profitability than smaller companies. Despite this lower profitability, return for shareholders remains reasonable with an average return on equity of 20% reflecting a shift to higher leverage, lower risk, asset light business model. Like all businesses, construction companies must demonstrate their financial viability by turning a profit and providing a convincing risk-adjusted return to their investors. Empirical evidence suggests that companies reporting low profitability are at increased risk of insolvency. Failure to acknowledge this may lead to serious financial implications for the industry and the economy.