Analysis of the largest UK construction contractors indicates that despite greater deal-flow, the financial position of many contractors remains weak, with cash balances and margins down, according to a new report published by KPMG.

The report Construction Barometer: Recovery in Sight? analyses the operating margins, cash balances and order books of 14 Tier 1 contractors from 2007 through to 2013. The detailed analysis revealed that net cash balances declined in 2013 and are now close to half their 2010 peak. As cash generated from operations have all but dried up since 2010, cash balances have been increasingly supported by significant sale of assets. Operating margins in construction continue to be squeezed. From a high of 2.8% across the industry in 2010, operating margins have fallen to an average of just 1.2% in 2013.

The report also found that persistent inflation in sub-contractor markets suggests that the negative pressure on margins is unlikely to ease off any time soon. This position is further highlighted by the several profit warnings issued in the first half of 2014. Order books tell a slightly more optimistic story from margins and cash, however, reporting growth from 2012 to 2013.

The UK government’s infrastructure spend indicates that there is plenty yet to come with over £116 billion committed to over 1,886 projects.

KPMG’s UK head of Infrastructure, Building and Construction, Richard Threlfall, said: “Construction contractors have been struggling with some of the most difficult market conditions ever encountered and even now – with all evidence pointing to sustained recovery – the industry faces real profitability challenges.

“Current margin and cash levels are unsustainable. With subcontractor rate increases and labour market shortages largely outside of contractors’ control, it is critical they continue to focus on improving their own efficiency.

He continued: “The industry can though take heart from the first signs of a recovery in order books. Ultimately, we believe contractors need to hang on until supply and demand for subcontractors and labour come back into balance, which we predict is still a year off. With good forward planning, strong businesses should be investing now in their supply chain and technology to take advantage of the £45 billion a year tidal wave of future work.”