If you’re involved in the engineering and construction (E&C) industry, there are three major trends coming your way that you need to be prepared for.
#1: Changes in contracting
To begin with, many companies are starting to use lump-sum, turnkey (LSTK) contracts where E&C firms undertake the lump sum and assure turnkey services. What this means is that private and public sector companies and organizations have a more realistic idea of project costs. As bids become more competitive, the clients can request LSTK contracts. Unfortunately, not all E&C firms are adept at LSTK contracts quite yet.
Also, public-private partnerships (PPPs) are on the rise—often because public entities lack the financial resources they need to make necessary infrastructure upgrades. Consequently, E&C firms have to invest in the project itself to even join the bidding process. This upward trend is just in its infancy stages in the U.S., but Strategy& predicts an increase in PPP projects.
Lastly, we now have a new project approach where prospective clients are required to take more control of project management. As a result, E&C companies can’t subsidize weaker operational areas with profits from their more robust areas.
#2: Continued market consolidation
Since 2014, E&C mergers and acquisitions have slowed down:
This is mainly because of buyer and seller uncertainty. However, Strategy& believes that market consolidation will start to increase again.
The first reason they believe this will occur is because of the negative effect this M&A drop has had on smaller firms, who already have taken steps to run as lean of operations as possible. They also won’t benefit from the (now) stabilized prices of oil for several years.
Consequently, it’s possible that these smaller firms won’t be able to meet their debt covenants by 2020. They may then find themselves wondering if they can operate as standalone companies, or if they should pursue being acquired by a bigger E&C player.
Secondly, though the M&A downturn has proved to be positive for bigger E&C firms, they’ll be expected to continue to grow and show their value to their stakeholders and shareholders. Consolidation is viewed a positive move in flat markets, so bigger E&C firms might look to do so in order to build a competitive advantage and move into new regions and markets.
#3: Increased global competition from China, India, and Korea
As E&C firms in China, India, and Korea have grown in their own countries, they’ve also increased their capital, project experience, and expertise. As a result, they’re now poised to be formidable foes in different parts of the world. Now, many of these companies are looking abroad for new projects.
Questions or comments? Please contact Michelle Philippon at mphilippon@teamCOACT.com