Consulting Engineers South Africa (CESA)'s Bi-Annual Economic Capacity Survey (BECS) from January to June 2015 just released indicates that fee earnings increased by around 1.2%, against an expected decrease of between 3% and 5%.
Some of the larger firms did better than expected, although several firms still reported negative growth in the first six months of the year. This follows a marginal contraction of 0.7% and an increase of 6% in the previous two surveys. Respondents expect earnings to fall by between 2% and 3% in nominal terms during the last six months of 2015. CESA has about 537 members firms employing 24 366 personnel.
Considering trends in industry indicators, as reported by responding firms, it is likely that earnings have reached an upper turning point with a softer growth outlook in the medium term.
CESA Acting CEO Wally Mayne is of the view that the trends are encouraging especially regarding growth in profitability and staff employment within our member firms.
"However, we believe that the trends would be better if more projects are brought on stream by the government, which will accelerate infrastructure delivery, reduce unemployment and provide much needed training and experience that our graduates desperately need," cautions Mayne.
Profitability and late payments
Profitability unexpectedly improved to an average of 14.4% from 12.2% and 13.7% in the previous two surveys.
The average profit margin for larger firms recovered to 9.4% in the first six months of 2015, from 4.3% in the previous survey (December 2014). Medium size firms managed to maintain profit margins at around 14%, while smaller firms reported a drop to 13.1% from 19% in the previous survey.
In line with the previous survey, majority of firms expect margins to weaken, although the percentage of those that expect receding profits increased from 54% in the previous survey to 63% in the current survey. This is a significant increase and clearly points to an industry under higher levels of financial distress.
The majority of larger firms (80%) are unsatisfied with prevailing margins, compared with only 16% of medium firms reporting unsatisfactory levels. The net percentage satisfaction rate remains deep in negative territory.
Payment remains a serious issue, having a broad based effect on firms operating in the industry. The percentage of fees outstanding for longer than 90 days as a percentage of total estimated income (including late payments) nonetheless increased only marginally to 24.5% from 24.0% in the previous survey. This ratio is however still higher when compared to the 17.4% in the June 2014 survey.
It is estimated that around R5,8 billion in earnings is currently outstanding after the 90 day period.
Employment improved in the first six months of 2015, up by 4%, supported by a 6% increase as reported by larger firms. This follows three consecutives survey periods of contraction. Compared to the same period last year, employment is estimated to have increased by around 2% to an estimated 23,838.
The number of firms looking for engineers increased to just under 70% from 48% and 82% in the previous two surveys. It would seem there is increased demand for technologists and other technical staff, where 68% and 51% of respondents reported the desire to increase staff. This is well above the average over the last four surveys of 34% and 18% respectively.
A total of 67% of firms reported difficulties in recruiting male engineers and 80% reported problems recruiting female engineers. These rates are also higher than in the previous survey. A higher percentage, between 87% and 90%, reported difficulties in recruiting previously disadvantaged male and/or female engineers. It would seem the issue on recruiting female engineers is becoming more profound, although bursaries are still mainly in favour of male recipients.
Capacity utilisation of technical staff has shown very little movement over the last few surveys, but is showing some tendency to slow, and averaged 87% in the June 2015 survey, down from 90% percent in the previous survey.
Since 2009, the majority of respondents largely expect utilisation rates to remain unchanged, and although there was an increase in the number of firms that expected levels to improve between 2010 and 2011, this position has reversed with currently only 23% expecting higher utilization rates in the next 6 months, relatively on par with the 21% in the previous survey. The trend line remains on a downward trajectory.
Competition in tendering
Competition in tendering generally eases during a time when the availability of work increases and intensifies during periods of work shortages. An easing of competition will generally lead to an increase in prices, while price inflation is capped during periods of work shortages due to the fact that an increasing number of firms tender on the same project. The tendering process is costly and time consuming, and higher levels of competition significantly increases the risk for the engineering firm.
Firms continue to mostly report on keen to fierce competition, but did report some level of moderation from a peak of 96% in June 2013 to 85% by December 2014. This is still above the average of around 80% reported during 2007 to 2008. Furthermore since 2010, between 50% and 70% of firms reported competition as fierce. This in itself suggests much tougher working conditions, and supports the trend by firms to discount more aggressively. On average, 55% of firms reported fierce competition, from 53% the previous (December 2014) survey.
There is a clear correlation between the level of discounting and competition. As competition started to intensify after 2009, the propensity to discount also started to accelerate. The average discounting rate accelerated in the last two surveys, to 25.8% in December 2014 and 25.2% in the June 2015 survey, which is the highest level since the inception of this particular question in the survey (June 2007). Stronger competition generally leads to higher levels of discounting. Discounted rates are benchmarked against the ECSA Guideline fee scales.
By comparison larger firms tend to discount more aggressively, although the average rate moderated to 34.0% in the June 2015 survey from an average of 40.0% in the previous two surveys. About 63% of larger firms reported fierce competition, the highest amongst all firm groups, and on par with the previous survey.
Medium size firms discounted at an average rate of 24.6% moderately lower than the 27.7%, reported in the December 2014 survey, against 39% that reported fierce competition.
Some of the challenges include: