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7/31/2019 Global Construction Survey 2012
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KPMG INTERNATIONAL
The great globalinrastructureopportunity
Global Construction Survey 2012
kpmg.com/building
7/31/2019 Global Construction Survey 2012
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b | The great global inrastructure opportunity
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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A brave new direction orengineering and construction?The last three years have been ull o uncertainty or many in the engineering
and construction industry. However, one constant is the insatiable demand or
inrastructure in all orms, which is causing a undamental shit in ocus or nearly all
players in the sector. The old imperatives o commercial, residential and industrial
building projects have taken second place in many geographies to energy, natural
resources, transportation, communication and technology, and other vital
civil and social inrastructure projects.
Much o this change is driven by the
pressing challenge o urban growth;with the proportion o the worldspopulation living in cities set to rise tomore than 70 percent by 20501, thereis immense pressure to provide aneective and reliable support network tothe teeming millions.
And while the continuing economicinstability is impacting many parts othe industry, inrastructure is so vitalto growth that even the most cash-strapped governments will inevitablygive it a higher priority or ace adrastic change in liestyles or theirpeople. Worldwide the expectedcost or inrastructure over the nextorty years is approximatelyUS$70 trillion.2
Engineering and construction companiesare changing to meet the growingdemands o inrastructure, withthe traditional general engineeringproviders and contractors giving way
to larger, more diversied businesseswith specialized skills. Winning newcontracts is increasingly about havingthe right expertise, so the battle orskilled resources is likely to intensiyeven urther, with a possible rise in
acquisitions to buy that expertise. New
inrastructure projects are expected to beon a huge scale, particularly in emergingmarkets such as India, China and Brazil,so size and global reach will also matter.
With scale comes complexity as theglobal industry players navigate atough political, commercial, regulatoryand governance environment whichwill test their risk management abilityto the maximum extent. Marginson mega-projects can be severelyimpacted by unoreseen scheduledelays, sometimes customer driven andsometimes sel-inficted. Although thesector has invested considerably in riskmanagement in recent years, a numbero high prole project ailures in the pasttwelve months raises question marksover the eectiveness o some o thisinvestment.
The shape o the industry is changing asthe main players seek to optimize costs,ocus on tax eciencies, streamline
supply chains, improve inormationtechnology systems (IT), capitalize onemerging markets, and grow throughmergers and acquisitions. But willthese eorts be enough to succeed?As the world rises to meet the great
inrastructure challenge o the next
decade, what role will engineering andconstruction companies play?
With these questions in mind, the latestKPMG Global Construction Surveycomes at an opportune moment,gauging the views o many o the seniorexecutives o leading engineering andconstruction companies rom aroundthe world. I would like to thank allthose who gave their valuable timeto contribute to this vital and ongoingassessment o the uture o the sector.
Geno Armstrong
International Sector Leader,
Engineering & Construction,
KPMG in the US
1. United Nations, Department o Economic and Social Aairs, Population Division (2011). World Population
Prospects: The 2010 Revision
2. Booz Allen Hamilton, Global Inrastructure Partners, World Energy Outlook, Organisation or Economic
Co-operation and Development (OECD), Boeing, Drewry Shipping Consultants, U.S. Department o
Transportation
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
7/31/2019 Global Construction Survey 2012
4/48 2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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Executive summary 02
Opportunities and threats 05The great energy and inrastructure opportunity
Perormance and uture expectations 13
Optimism in the midst o uncertainty
Efciency 19
Building better practices
Risk management 29
Coping with risk in a changing world
Looking orward 36
The engineering and construction company o the uture
About the survey 38
Contents
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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Demand for power and energy ischanging the direction of construction
Power and energy offer the best opportunities for
revenue growth
Public-Private Partnerships (PPPs) most likely to be
focused on energy and transportation projects
Procurement and supply chain playa critical role in future success
59 percent of respondents say this area offers the
greatest opportunity to improve efficiency
Overly-complex systems and processes are hindering
progress
37 percent of firms from the Americas have not
reviewed their procurement and supply chain
processes for at least five years
Existing infrastructure is seen asinadequate to support growingurbanization, population growth andchanging demographics
53 percent feel government policies will fail to have a
positive influence on infrastructure investment
80 percent believe government is showing a lack of
leadership over infrastructure development
IT needs to step up a level
50 percent say that IT transformation is too costly and
takes too long
Surprisingly, 71 percent say they have formally
reviewed their IT systems within the previous 12
months
Cost reduction remains on theagenda
Organizational culture is the biggest barrier to
greater cost efficiency
21 percent of respondents have not made
significant cost reductions rising to 29 percent
in Europe, Middle East and Africa
Forces shapingthe industry
Drive for greaterefficiency
Executive summary
2 | The great global inrastructure opportunity
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 3
Optimism over future prospectsdespite economic uncertainty
49 percent forecast an increase in backlog over the
next 12 months, with Asia Pacific companies the mostconfident
75 percent believe margins on new bids will be equal
to or more than existing backlog
Revenue recognition concerns easing
Many construction contracts now likely to be considered as
single pieces of work in the proposed accounting standard
Revenue/profits for most contracts to be recognized continu-
ously as work progresses, meaning less earnings volatility
than previously feared
Companies still face retrospective implementation challenges
Despite considerable investment, riskmanagement remains in question
46 percent of respondents say few projects exceed the
original bid margin; in Europe, Middle East and Africa this
figure rises to 56 percent
54 percent failed to identify upfront the issues that later
caused margin erosion
Only 36 percent feel their project review processes are
very efficient
Investment in emerging markets still amajor challenge
Access to skilled resources the single biggest concern
A need for morecertainty in avolatile world
A brighterfuture or
continued pain?
In 2011, KPMG interviewed executives rom 161 engineering
and construction companies around the world. The
respondents annual revenue varied in size rom US$250 million
to more than US$5 billion, and served a range o markets
including energy, power, industrial, healthcare/pharmaceutical,manuacturing, mining, education and government.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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4 | The great global inrastructure opportunity4 | The great global inrastructure opportunity
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 5
Opportunities and threats
The energy and inrastructureopportunityEnergy is the sector with the greatest short-term potential
or engineering and construction companies, according to
the 2012 Global Construction Survey. However, respondents
are questioning governments commitment to much needed
inrastructure investment.
Energy is the sectorwhere respondentsare most confdento increasingrevenue, ollowedby roads/bridges,rail and mining.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member frms o the KPMG network o independent frms are afliated with KPMG International. KPMG International provides no client services. All rights reserved.
When asked which sectors would most impact their uture revenue in the next
twelve months, energy was the number one response, suggesting a strong
demand or specialized engineering and construction services rom customers
in this segment. Four o the top fve industries selected by respondents ft
into the category o inrastructure with traditional areas such as commercial,
industrial, retail and education considered ar less attractive.
In the Americas the picture is even more pronounced, with 59 percent citing
energy as the most promising sector. Larger US contractors are expressing
genuine optimism over prospects or oil, gas and alternative energy projects,
and expect signifcant amounts o activity in this area over the next fve years.
Respondents rom Asia Pacifc and Europe, Middle East and Arica consider
rail and mining to be areas o promise (see chart on page 6).
In China, where the latest Five-Year Plan has a strong domestic ocus,
there is an emphasis on resource-related inrastructure such as coal
mining, high-speed rail, roads and waterways. Meanwhile, in Hong Kong,
a number o important inrastructure projects will be carried out over the
next 56 years including underground train lines, bridges, and express
links to mainland China.
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6 | The great global inrastructure opportunity
Educational
Retail
Industrial
Office
Water-related
Healthcare
Mining
Rail
Roads/Bridges
Residential
Power/Energy
Overall
n=160
41% 11%
24% 23%
24% 24%
23% 4%
21% 4%
19% 9%
18% 8%
18% 20%
17% 20%
16% 27%
9% 27%
Americas
n=27*
ASPAC
n=49
EMEA
n=84
Sectors most impacting revenue in the next twelve months
Increase Decrease
*Low base findings are directional in nature
Respondents chose top two sectors for both increase and decrease.
Source: KPMG International, 2011
11%59%
7% 22%
15%
11%
33%
7%
19% 0% 2%
19% 4%
11% 11%
7% 22%
26% 15%
7% 19%
4% 22%
10%35%
33% 14%
22%
18%
24%
4%
29% 8%
24% 12%
20% 12%
12% 20%
12% 18%
18% 29%
12% 39%
12%39%
25% 27%
27%
30%
20%
2%
17%
1 5% 8 %
19% 5%
24% 19%
17% 23%
17% 29%
10% 21%
View Point
The power market surges ahead
According to the International EnergyAgency latest estimates, released inNovember 2011, the global energy sectorrequires US$38 trillion o investment inexisting and new capacity by 2035 tomeet the demands o population growth.US$17 trillion o this will need to owinto power generation, distribution andtransmission, 60 percent o which willserve emerging markets.3
Given the proper regulatory rameworkand government support, the undsshould be there to support thisdevelopment; but the big question
3. International Energy Agency (IEA), October 2011.
Peter Kiss
Global Head o Power& UtilitiesKPMG in HungaryE: [email protected]
mark is the availability o skilled labor.The long development cycles 12 yearsor a nuclear plant and six years or gasor coal-fred plants puts incrediblepressure on a manpower base that isalready stretched.
The demand or frms and individualswith sector-specifc engineering andconstruction skills will rise as projectsprolierate around the world. This should
push up the margins or specializedplayers and prove a major source oincome or the industry as a whole.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member frms o the KPMG network o independent frms are afliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 7
Less than halo respondentsbelieve governmentpolicies will havea positive impacton inrastructureinvestment.
Lack o commitment to inrastructure
With austerity policies in manycountries constraining the scope orpublic sector spending, it is vital tocreate an environment that encouragesprivate sector investment. It isthereore o some concern that only47 percent o respondents consider
their governments policies are havinga positive impact, a response that is
airly consistent across all regions.Interestingly, executives rom thebigger organizations involved in thesurvey are the least optimistic thatpublic sector policies are helping perhaps an indication that governmentsare ocusing on smaller-to-medium
sized enterprises and assuming largerbusinesses need less help.
Impact of government policies on infrastructure investment
Region Size
Significant positive impact
Fairly negative impact
No impactFairly positive impact
Dont knowSignificant negative impact
*Low base findings are directional in nature
Percentages might not add up to 100 due to rounding offSource: KPMG International, 2011
More than
USD 5 billion
(n=24*)
USD1-5 billion
(n=58)
Less than
USD1 billion
(n=79)
EMEA
(n=85)
ASPAC
(n=49)
Americas
(n=27*)
Overall
(n=161)
8%
8%
16%
23%
24%
18%
15%
7%
15%
19%
22%
8%
20%
22%
27%
19%
18%
8%
8%
14%
25%
22%
18%
3%
10%
16%
26%
19%
21%
8%
17%
25%
25%
8%
13%
11%
4%
14%
20%
32%
18%
4%
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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8 | The great global inrastructure opportunity
PPPs commitment to energy
Energy tops the list o attractive
projects to be delivered under
public-private partnership (PPPs),
closely ollowed by transportation.
Respondents rom the Americas are
particularly interested in the transport
market, where the US is keen to
improve its rail, road, air and shipping
network to cope with 21st century
demands.
OthersTele-
communications
EducationHousingWasteWaterHealthTransportationEnergy
12%
7%
4%
18%
12%
0%4%
20%
0%
9%
4%
14%
4%4%4% 4%
7%
4%
12%
5%
21%24%
19%19%
34%31%
40%
19%
26%
12%
16% 16%
33%
56%
30%
24%
Sectors offering the most attractive potential for public-private partnerships (PPPs)
Overall (n=160) Americas (n=27*) ASPAC (n=49) EMEA (n=84)
Figures do not add up to 100% because multiple responses were allowed
*Low base findings are directional in nature
Respondents had ability to select more than one sector.
Source: KPMG International, 2011
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member frms o the KPMG network o independent frms are afliated with KPMG International. KPMG International provides no client services. All rights reserved.
Respondents are also very concerned
about governments ability to drive
inrastructure spending, with anoverwhelming 80 percent citing lack o
leadership as a major barrier. It is not
just the politicians who appear to be
holding back development, as two-thirds
eel the private sector is not showing
enough initiative either, though public
tendering rules oten make it hard or
a private sector business to capitalize
on a good idea without it being opened
to competition (see chart on opposite
page). Despite the potential rewards
rom inrastructure projects in certain
regions, a number o US businessesremain reluctant to take the risks
associated with equity positions in
such initiatives.
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The great global inrastructure opportunity | 9
Overall Americas ASPAC EMEA
Most significant barriers to infrastructure investment
Most important risk
*Low base findings are directional in nature
Respondents ranked the top two barriers to investment
Source: KPMG International, 2011
Others
Lack of investment
by the private sector
Cost of debt
Debt market liquidity
constraints
Regulatory
burden/red tape
Planning system
Lack of investment
by government
Lack of private
sector initiative
Lack of leadership
by government80
9*
70
25*
42
27*
13*
13*
19*
17*
1*
15*
3*
9*
3*
0*
3*
1*
30
2*
16*
8*
10*
8*
4*
3*
9*
33
6*
39
14*
23*
16*
9*
7*
9*
80% 71%
100%
60%
33%
67% 13%
33%
83%
50%
56%
38%
40%
31%
82%
67%
46%
57%
52%
33%
67%
51%
48%
38%
30%
23% 33%
15%
11% 11% 11%
Base Base Base Base
View Point
Nick ChismGlobal Head oInrastructure
KPMG in the UKE: [email protected]
Waking up to the inrastructure opportunity
As governments around the world seekto create 21st century inrastructure,they need to take a strong lead tocreate an environment that encouragesprivate sector investment. This meansaddressing regulatory and legislativebarriers and showing the kind o long-term will that transcends immediatepolitical popularity.
New investment models have tomeet the interests o both the publicand private sectors, with a better
understanding o risk allocation, greatertransparency and more accuratemeasures o cost and perormance.Government should ensure it buildsmutual trust and cultural understanding
o its commercial partners, and showsstrong leadership to push projectsthrough multiple departments andcompeting interest groups. The publicsector also has to improve its technicalskills in procurement, planning andproject management.
Funding will be a urther challenge,so governments should be willingto pursue existing and new sourceswhether it is higher tax, increasedenergy bills, or pay-per-use resources
such as road tolls. And given the globalpush or inrastructure, there will beintense competition or resources andskills, so every state must work toattract the best private sector talent.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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10 | The great global inrastructure opportunity
71%say economicuncertainty is thebiggest businessconcern in their
home region.
Economic conditions ront o mind
Continued worries over the state othe global economy are refected in thesurvey ndings. Not surprisingly, whencommenting about current businessconditions in their home regions, alarge majority (71 percent) say thateconomic uncertainty is the biggest
concern. Given the ongoing crisis overthe Euro, it is no real surprise that rmsrom EMEA are the most nervous, withone European executive quoted assaying: Even the traditional optimistsare nding it less cheerul.
Respondents rom Asia Pacic arerelatively less pessimistic abouteconomic prospects and instead pointto skills shortages and infation as acontinuing worry, with Hong Kong andChina suering rom a lack o basicconstruction resources and some
commodity prices rising at a double-digit rate. In the Americas, the growingUS government decit is proving amatter o some concern to constructionexecutives, who ear this may constrainany economic recovery.
Greatest concerns over business conditions in your principal region
Overall (n=161) Americas (n=27*)
ASPAC (n=49) EMEA (n=85)
20%
71% 70%
82%
51%
31%
26%
45%
25%
Economicuncertainty
Skillshortage
Governmentdeficits/debt
Others Newcompetition
Inflation Dealingwith regulatory
changes
Unemployment
30%
52%
12%
34%
20%
15%18%
15%
37%
13%
22%
13%
7%
27%
7%11% 11%
8%12%
4% 4% 2%5%
Yes percentages represented
*Low base findings are directional in nature
Respondents chose top two greatest concerns
Source: KPMG International, 2011
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 11
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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12 | The great global inrastructure opportunity12 | The great global inrastructure opportunity
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 13
Perormance and uture expectations
Optimism in the midsto uncertaintyIn spite o the troubles aficting sovereign debt and even more
worrisome, the crisis impacting the Euro zone, engineering and
construction industry executives remain positive about the uture.
Hal expect backlogs to increase in the next year and the majority
eel margins will either rise or stay at current levels.
2011 appears to have been a solid yearor the sector, with 56 percent reportingan increase in backlog and only 18percent experiencing a decline. Thebest perorming region was Asia Pacic,where almost two-thirds (64 percent)say their backlog has gone up, dueto intense activity in Hong Kong andChina. The economic woes in Europeare mirrored by the survey responses
or this region, with only 21 percentreporting a signicant increase. In the
UK, or example, some o the biggestplayers are nding their order booksdeclining and are preparing or aprolonged recession.
Perormance among the biggercompanies was noticeably poorer thantheir smaller counterparts. A number olarge organizations may have workedthrough their backlog, and are nowaected by a lack o major public and
private projects many o which remainon hold.
Change in backlog from 2010 to 2011
Region Size
Increased 5-15%Increased more than 15%
Decreased 5-15%
Mostly unchanged (+/-5%)
Decreased more than 15%
Percentages might not add up to 100 due to rounding off
Source: KPMG International, 2011
More than
USD 5 billion(n=23*)
USD1-5 billion
(n=58)
Less than
USD1 billion(n=79)
EMEA
(n=85)
ASPAC
(n=49)
Americas
(n=27*)
Overall
(n=160)
14%
24%
28%
28%
4%
15%
22%
26%
33%
20%
29%
35%
10%
4% 2%
26%
27%
21%
15%
6%14%
21%
34%
26%
2%
13%
43%
22%
22%
14%
20%
24%
30%
8%
64%o respondentsrom Asia Pacifcsay their backloghas gone up in 2011.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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14 | The great global inrastructure opportunity
Compared to KPMGs previous GlobalConstruction Survey, backlog marginsappear to have improved signicantly,with more than twice as many companiesenjoying an increase in 2011. Theproportion experiencing declining marginshas also dropped a ew points. The worstperorming region is the Americas, where41 percent o respondents report a dropin margins. This may be due in part to a
shit in the balance o power in avor ocustomers, who are negotiating lower
margins on uture projects, and becauseo new oreign entrants who are causingan increase in competition.
Despite reporting the lowest backloggrowth, the larger companies involved inthe survey have still managed to maintaintheir margins, with 44 percent reportingan increase. These organizations havemanaged to take a lot o cost out o their
businesses in recent years and many arenow running lean, ecient operations.
Change in backlog margin from 2010 to 2011
Region Size
Increased more than 5%
Decreased 2-5%
Mostly unchanged (+/- 2%)Increased 2-5%
Decreased more than 5%
Percentages might not add up to 100 due to rounding off
Source: KPMG International, 2011
More than
USD 5 billion
(n=23*)
USD1-5 billion
(n=58)
Less than
USD1 billion
(n=79)
EMEA
(n=84)
ASPAC
(n=49)
Americas
(n=27*)
Overall
(n=160)
16%
48%
13%
13%
7%
30%
37%
15%
7%
44%
16%
12%
19%
11% 4%
55%
12%
12%
10%
7%
21%
59%
9%
3%
7%
13%
4%
39%
9%
35%
14%
44%
16%
13%
8%
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 15
Positive uture expectations
Looking ahead to the next 12 months,the engineering and constructionindustry appears to be airly optimisticabout backlog even in the troubledEurope, Middle East and Arica region,which is a surprising response given theuncertainty over the state o the Euro.
Only a small proportion o respondentsorecast a decline in backlog andhal expect an increase. Asia Pacicrespondents are the most condent ocontinued improvement, again uelledby the ongoing construction boom inChina and Hong Kong, ocused primarilyon inrastructure.
Interestingly, the smaller-to-mediumsized companies involved in the surveyexpect to see a substantial rise inbacklog, probably because any wins theyhave enjoyed will have a bigger impactproportionately on their smaller portolio.With many major inrastructure projects
on hold, modest repair and maintenancecontracts are the order o the day, whichare more likely to be picked up by thesmaller, locally-ocused contractors.Backlog orecasts or bigger rms aresteadier with a majority (61 percent)anticipating no change, which refectstheir greater diversity.
11%Only 11 percent ofrms anticipate a
decline in backlogin 2012.
Backlog forecast for the next 12 months
Region Size
Increased more than 15%
Decreased 5-15%
Mostly unchanged (+/-5%)Increased 5-15%
Decreased more than 15%
Percentages might not add up to 100 due to rounding off
Source: KPMG International, 2011
More than
USD 5 billion
(n=23*)
USD1-5 billion
(n=58)
Less than
USD1 billion
(n=79)
EMEA
(n=84)
ASPAC
(n=49)
Americas
(n=27*)
Overall
(n=160)
9%
37%
28%
21%
2%
11%
41%
19%
22%
35%
29%
24%
6%
7% 2%
37%
30%
20%
11%
2%
10%
40%
31%
16%
3% 4%
61%
26%
9%
10%
28%
27%
29%
4%
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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16 | The great global inrastructure opportunity
The majority o respondents believethat uture margins will be largelyunchanged even in Asia Pacicwhere, as mentioned, markets such asHong Kong are undergoing very highinfation that could push up the price omaterials. However in the Americas, athird say that margins are going down,which in an industry that is already low-margin could lead to urther stress on
the business.
The larger rms are extremely condentthat they can maintain current levels oprotability. These companies havelonger term backlogs, giving greatercertainty over uture revenues, costs andmargins. They also tend to have older and
deeper client relationships so they knowmore about customers capital spendingplans, enabling better targeting andconversion o opportunities.
In contrast, smaller rms are lessdiverse and can quickly suer i aparticular sector is underperorming, soit is o some concern that 25 percento smaller-to-medium-sized businesses
are expected to endure even lowermargins, which again could createurther distress or some companies.Many such rms are anticipating acontinuingly competitive market andmay be willing to take on work at lowmargins just to maintain cashfow andretain workers.
Margin forecast on current bids versus margin in current backlog
Region Size
Margins on new projects are more than 2 percentage points higher than existing backlog
Margins on new projects are mostly unchanged (+/-2 percentage points) versus existing backlog
Margins on new projects are more than 2 percentage points lower than existing backlog
Unsure
Percentages might not add up to 100 due to rounding off
Source: KPMG International, 2011
More than
USD 5 billion
(n=23*)
USD1-5 billion
(n=57)
Less than
USD1 billion
(n=79)
EMEA
(n=84)
ASPAC
(n=48)
Americas
(n=27*)
Overall
(n=159)
21%
62%
13%
2%
33%
15%
52%
69%
13%
17%
62%
13%
19%
6%
4% 1%
21%
65%
12%
4%
83%
13%
25%
54%
14%
6%
75%believe that marginson current bids willbe either the sameor higher than or
existing projects.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 17
Paving a smooth road to acquisition
With a number o businesses either
stressed or distressed, and others
shedding non-core elements to
raise cash, merger and acquisition
(M&A) opportunities abound or
those engineering and constructioncompanies looking to add new
capabilities or improve on existing
ones.
However the road to acquisition is
strewn with obstacles, so buyers have
to ensure they have a strong M&A
team and robust processes to help
uncover risks in the targets business,
including quality o earnings, quality o
assets, customer and supplier matters,
cultural t, retention o key personal
and specialist skills, achievement osynergies, nancial reporting, tax and
accounting structuring, projections,
and integration risk assessment.
Historical operating results may be
distorted by the recent economic
downturn which requires even urther
in-depth analysis o prior operating
results, current backlog and projected
uture earnings.
The acquirer should be able to
rapidly mobilize a global M&A team
with knowledge o the targets
business (through its own strong
industry experience), as well as an
understanding o the broader risksand challenges associated with
transactions. The team should also
have the skills and the willingness to
challenge nancial projections, assets
strength and customer and supplier
relationships, and understand potential
tax exposures that could aect the
deal, as well as urther risks inherent in
integrating the new entity. Also, local
country expertise is critical in assessing
the risk o illegal and questionable acts
or payments, currency restrictions and
other relevant risks related to operating
in oreign jurisdictions.
In carrying out the right due diligence,
potential purchasers should identiy
the signicant risks existing within the
target, to uncover any deal-breaking
issues that could aect the sale
price or even scuttle the deal, such
as purchasing behavior o targets,
major customers, supplier activity,
distribution channels and competition.
It is also important to carry a
detailed analysis o the key nancial
inormation necessary to evaluate
synergies and value creation, includingthe drivers o sustainable prots and
uture cash fows. Access to key data
is vital, and calls or a sizable team to
gather and analyze inormation.
KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
View Point
Tony Bohnert
Transaction Services Partner,
KPMG in the US
2012 KPMG International Cooperative (
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18 | The great global inrastructure opportunity18 | The great global inrastructure opportunity
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The great global inrastructure opportunity | 19
Efciency
Building better practicesAs they seek greater eciency, engineering and construction rms
are trying to overcome a range o complexities in procurement and
supply chain processes. And, while acknowledging the need to
replace oten outmoded IT systems, theyre also concerned with the
cost and eort required.
The executives taking part in the surveyeel that two areas o the businesshave the biggest potential or improvingeciency: procurement/supply chainmanagement and business processes.Procurement/supply chain is a hugelycritical component o the overallservices delivered, and those with themost ecient and competitive supplychains are likely to win more work,
especially in emerging markets such asBrazil, Russia, India and China.
In addition to these actors, a number orespondents rom larger organizationsare ocused on optimizing their ITsystems and rationalizing legal entities,both o which can help to reduce thecomplexity inherent in businesses oscale and diversity.
Top functional areas with opportunities to improve efficiency
Overall (n=161) Americas (n=27*)
ASPAC (n=49) EMEA (n=85)
16%
59%
48%
62%
59%
53% 52% 51%
55%
21%19%
29%
18%
15%
11%
16%
19%
10%
19%
15% 14%
19% 18%
11%
9%11%
6%
9%
4%
15%
2% 2%
Procurement/
supply chain
management
Refining
business
processes
IT systems
optimization
Knowledge
management
HR
management
Shared services/
Outsourcing
Legal entity
rationalization
Tax expense
efficiencies
Yes percentages represented
*Low base findings are directional in nature
Respondents chose top two functional areas.
Source: KPMG International, 2011
59%o respondents eelthey can gain greaterefciency out otheir procurement
and supply chainactivities.
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20 | The great global inrastructure opportunity
Creating a low-cost culture
In the continued dicult economicconditions, cost reduction remains highon the agenda or most companies.According to the respondents, the singlebiggest challenge to cutting costs isorganizational culture, particularly in theAmericas, where 78 percent cite this
actor, suggesting old habits are provingdicult to break. Larger companiesare concerned that they cannot easilyidentiy where excesses exist withintheir organization, which once again
highlights the need or better businessprocesses to manage the complexities omultinational businesses.
Surprisingly, 17 percent say that costreduction has simply not been a priority.These executives may representcompanies that have already trimmed
costs extensively during the recessionand now have very lean operations, withlittle or no scope or urther reductions.
Challenges in reducing costs
Overall (n=160) Americas (n=27*)
ASPAC (n=49) EMEA (n=84)
Changing the
culture
Reluctance to cut direct
labor force in light of the
projected market
rebound
Not enough processes
are automated, driving
the need for increased
indirect labor
Uncertainty over
where the excesses
exist in the organization
It has not been
priority to reduce
costs
Others
Yes percentages represented
*Low base findings are directional in nature
Respondents chose top two greatest challenges.
Source: KPMG International, 2011
28%
61%
78%
57%59%
29%
37%
18%
32%
29% 30% 29% 29%
17%
7%
16%
19%
31%29%
20%
37%
30%
47%
33%
78%o engineeringand constructioncompanies romthe Americas say
organizationalculture is a barrierto cutting cost.
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The great global inrastructure opportunity | 21
Cost cuts seem to be spreadairly evenly across a number odierent departments, although riskmanagement has been impacted themost. Again, its remarkable that ath o all respondents say they havemade no signicant cost reductions a gure that increases to 29 percentin Europe, Middle East and Arica. Anumber o rms in this region contract-
in resources on a project basis andhave little direct labor. With ewer
xed costs, there is less need to cutback. Many had also been optimistico an economic recovery and elt theycould ride out the storm. In addition,the larger European businesses areprotected by their diversity so theycontinue to prosper in certain sectors(such as utility-related projects in theUK) despite the decline in constructionand civil engineering work.
Areas of your business where cost reductions will have the greatest impact
Others
Regulatorycompliance
Financial risk
management
Management of outsourcing/
extended supply chain
Employee talent pool and training
& leadership pipeline
We have not made significant
cost reductions
Risk management
Overall Americas ASPAC EMEA
21%
16%
13%
8%
1%
19%
n=160 n=27* n=49 n=84
30%
11%
22%
15%
7%
15% 24%
16%
18%
6%
6%
2%
27% 11%
7%
14%
15%
29%
24%23%
Yes percentages represented
*Low base findings are directional in nature
Source: KPMG International, 2011
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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22 | The great global inrastructure opportunity
Simpliying supply chain management
Attempts to establish consistent bestpractices in procurement and supplychain are altering due to over-complexsystems and processes, accordingto KPMGs 2012 Global ConstructionSurvey. Engineering and constructionbusinesses in Asia Pacic say they are
suering rom a lack o robust data,while the larger multinational playersrom all regions are nding that theirsheer size and spread makes it hard
or personnel to ollow a commonstandard.
O course, none o this is helpedby the act that, in the Americas atleast, nearly our in 10 (37 percent)claim not to have reviewed theiroverall procurement and supply chain
processes or at least ve years andsome have never carried out such areview.
Greatest challenges in enhancing procurement/supply chain management
Overall (n=161) Americas (n=27*)
ASPAC (n=49) EMEA (n=85)
Disparate processes
and systems create
inconsistencies and
unnecessary
complexities
Too many manual
processes or
unnecessary
steps along the
supply chain
Lack of quality
information and
trend data
Geographic separation
of supply chain
personnel creates
complex handoffs
Our skills have not
kept pace with
advance in system
technology
Others Not relevant
Yes percentages represented
*Low base findings are directional in nature
Respondents chose top two greatest challenges.
Source: KPMG International, 2011
25%
39%
48%
35%
41%
38%
22%
35%
45%
29%
15%
39%
28%
12%
19%
10%
33%
20%
25%
12%
20%
26%27%
15%
18%19%
14%
20%
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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The great global inrastructure opportunity | 23
View Point
Douglas GatesPrincipal, AdvisoryKPMG in the USE: [email protected]
In the supply chain, knowledge is power
The recession has exposed weaknessesin many engineering and constructioncompanies procurement and supplychains. In the good times, when marginswere relatively high, organizations were
more concerned about getting hold omaterials quickly than keeping costsdown. However, in todays competitivemarket conditions, a ew percentagepoints on purchase prices can make thedierence between a prot and a loss.Inventory costs have also surged, asstock levels have risen due to cancelledprojects and uncertainty over utureavailability.
In a number o regions, suppliershave either gone out o business or
downsized, orcing companies to lookoverseas or alternative sources, addinggreater complexity to the supply chain.Engineering and construction businessesare typically ragmented (partly a resulto having grown through mergersand acquisitions), with a high level olocal autonomy and series o disparateenterprise resource planning (ERP)
systems around the dierent businessunits, preventing leaders rom gaininga complete view o purchasing activityacross the business.
As the respondents in this years survey
acknowledge, investment in IT doesntcome cheap; a ully-integrated systemcan cost tens o millions o dollars andtake rom two to ve years to complete.Nevertheless, those brave enoughto und major IT enhancements arenow reaping the rewards o greatercentralization and transparency. Theycan reduce purchasing costs by takingadvantage o economies o scale. Theycan also take a high-level view acrosstheir supply chain to spot any weak
links, and hedge against price risesor alls by buying advance stock, orpossibly vertically integrate to saeguardsupplies o vital materials. Finally, theycan improve orecasting by workingclosely with suppliers at dierent pointsin the supply chain on orecasting, toensure adequate capacity and optimuminventory levels.
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24 | The great global inrastructure opportunity
Getting value out o IT spendHaving invested heavily in IT in the late1990s in preparation or the Year 2000bug, the industry has allen behindsomewhat in the quality o its systems,with an excess o manual procedures thatpush up costs and slow down reporting.However, there is a question mark overcompanies commitment to upgradingor replacing systems, as respondents
greatest IT optimization challenge is thetime and cost o transormation. A third(33 percent) think there are not enoughconstruction-specic ERP packages,which makes implementation even moredicult. A number o executives romcompanies in Europe, Middle East andArica eel that their organizations cannotdemonstrate the value o IT spend.
Greatest Challenges in IT Optimization
Overall (n=160) Americas (n=27*)
ASPAC (n=49) EMEA (n=84)
An insufficient
number of ERP
packages has been
designed with the
E&C industry in mind
Change in IT
systems takes too
long and costs
too much
Excessive use of
workarounds
Disproportionate
amount of IT
spend it focused
on supporting
existing technology
Your company
is not able to
demonstrate
the value of IT
spending
Complaints that
legacy systems
were better
Others Not relevant
19%
50%
44%
51%51%
33%
30%
37%
32%
29%
33%31%
27%
14%
4%6%
30%
20%
14%
23%
11%
19%
10%8%
23%
19%
29%
20%
11% 11%
8%
12%
Yes percentages represented
Respondents chose top two greatest challenges.
Source: KPMG International, 2011
In trying tooptimize IT, the
greatest concernis the time and
cost o businesstransormation
programs.
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The great global inrastructure opportunity | 25
62%have reviewed theirtax accountingmethods in the pasttwelve months.
Managing tax eectivelyIn an increasingly global, interconnectedmarketplace, tax is gaining in importanceas companies seek to be compliantand optimize their structures andreporting. This includes issues suchas: income/expense recognition orlong-term contracts; simplied cost-to-cost percentage completion method;accounting or xed assets andinventories; and R&D credits.
Encouragingly, 62 percent o thosetaking part in the survey say they havereviewed their tax accounting methodsin the past 12 months, suggestingthat most businesses are seeking toimprove their procedures. Given theglobal nature o their businesses, it issurprising that the larger organizationsare the least likely to have conducteda critical appraisal; indeed, one-sixth(17 percent) o all large companiesclaim to have never held such a review.
In optimizing tax, no single actorappears to be o most importance,although Americas respondents pointto a lack o processes or coordinatingtax managers with project managers,along with tax complexities associatedwith cross-border nancing.
Possibly the most extraordinaryrevelation is that almost hal
(45 percent) o all executives in thesurvey eel that tax optimization is notrelevant to their organization. Sucha mindset may be more prevalentamong companies that are lessglobal and thereore have eweropportunities or tax planning. It isalso possible that some executivesdo not appreciate the ull potential otax optimization, viewing tax as moreo a housekeeping unction.
Greatest challenges in tax optimization
Overall (n=161) Americas (n=27*)
ASPAC (n=49) EMEA (n=85)
Others Not relevant
22%
18% 18%
12% 11% 11%
3%
14%
45%
33%
22%
30%
15%
11%
19%
0%
11%
30%
14%12% 12%
18%
8% 8%
4%
8%
57%
24%
20% 18%
7%
12%
9%
4%
19%
44%
Lack of processes
for timely
coordination of
tax, finance and
business unit
project managers
Lack of
understanding of
the proper or
available
tax treatments
Tax implications
of cross-border
financing is
complex and
not efficiently
managed
Tax
departments
lack of
strategic
leadership
Inconsistent
methodologies
used throughout
the company
Existing IT
systems do
not provide
adequate detail
or are not
adequately
leveraged by
the tax
department
IT systems are
changed
without proper
tax department
input
Yes percentages represented
*Low base findings are directional in nature
Respondents chose top two greatest challenges.
Source: KPMG International, 2011
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26 | The great global inrastructure opportunity
View Point
Michael MooreTax Market LeaderKPMG in the USE: [email protected]
Tax is an integral part o your business
As the industry becomes more global,engineering and construction rms areexposed to an ever wider range o taxregimes, any one o which can havea big impact upon earnings. Perhaps
the biggest challenge is determiningwhich countries will tax a project. I aproject based in a low-tax country losesmoney there is very little tax benet.Conversely or work based in high-taxnations, successul, high-margin workwill be taxed heavily.
Bidding teams should thereore look toinclude appropriate specialists at theearliest stages o the tender process, toassess potential tax risks and structurethe contract in a way that optimizes the
overall tax burden. A project tax plan isjust the start; systematic monitoring isneeded to ensure compliance, with acontrol approval committee or largermultinational projects where volatility ishigher.
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The great global inrastructure opportunity | 27The great global inrastructure opportunity | 27
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28 | The great global inrastructure opportunity28 | The great global inrastructure opportunity
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The great global inrastructure opportunity | 29
Risk management
Coping with risk in achanging worldWith signicant incidents o margin erosion, respondents
are understandably eager to continue to improve their risk
management, while just 36 percent believe their project
review processes to be very ecient.
The occasional incidence oailing projects (sometimes withcatastrophic consequences) conrmsthat engineering and constructioncompanies are never immune torisks across their range o activities.This years survey suggests thatthe industrys senior executivesare concerned about a range orisk management issues, with
quantication o risk at the top o thelist and risk identication the nextmost important.
Respondents rom the Americas areespecially keen to better understandthe link between strategy and risk,
while bigger construction rms see riskmitigation as their biggest challenge.Some companies may have had dicultyidentiying or even ranking all risks priorto executing strategic plans, especiallywhen entering a new market sectoror geographic location or pursuingaggressive growth. Others may haveheavily incented middle managementto grow, meaning that leaders struggle
to keep a ocus on risks, some o whichare out o a contractors control. Othersmay have tried to contractually mitigateevery risk, only or the customer/ownerto squeeze the prot margin during thenegotiation stage.
Greatest challenges of enterprise risk management
Overall (n=161) Americas (n=27*)
ASPAC (n=49) EMEA (n=85)
Quantifying risks Identification of risks Mitigation of risks Tracking and
reporting on risks
Understanding the
link between strategyand risk
Yes percentages represented
*Low base findings are directional in nature
Respondents chose two greatest challenges.
Source: KPMG International, 2011
Others
45%
40%
36%34%
28%
10%
33%
52%
26%
19%
48%
15%
43%
31%
41%39%
24%
14%
49%
42%
36% 35%
24%
6%
Constructionexecutives areconcerned aboutseveral riskmanagement issues,with quantifcation
o risk frst andrisk identifcationsecond.
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.
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30 | The great global inrastructure opportunity
Identiying and addressing risksto margins
Almost hal o the respondents say thatewer than 25 percent o their projectsexceed the original bid margin, indicatingconsiderable room or improvementin dealing with project risks such asrising costs, supply chain interruptions,
nancing and resource shortages.
The situation appears more acute inEurope, Middle East and Arica, as wellas among the smaller companies in thesurvey. It is likely that big engineering andconstruction rms have better-developedprocesses or assessing and addressing
project risk.
Proportion of projects delivered above original bid margin
Region Size
Less than 25%
50.1% to 75%
100%
25.1% to 50%
75.1% to 100%
*Low base findings are directional in nature
Percentages might not add up to 100 due to rounding
Source: KPMG International, 2011
More than
USD5 billion
(n=23*)
USD1-5 billion
(n=58)
Less than
USD1 billion
(n=79)
EMEA
(n=84)
ASPAC
(n=49)
Americas
(n=27*)
Overall
(n=160)
15%
24%
46%
13%
2%
19%
37%
15%
30%
29%
35%
16%
20%
55%
14%
6%
20%
4%
10%
14%
33%
41%
2%
22%
4%
30%
13%
30%
9%
14%
22%
54%
1%
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The great global inrastructure opportunity | 31
54%say that or
projects thatsignifcantly under-
perormed, they
ailed to identiythe ultimate causeo margin erosion
at the biddingstage.
When asked about projects that
signifcantly under-perormed, a majority
(54 percent) admit they ailed at bidding
stage to identiy the risk that ultimately
materialized and caused margin erosion.
This is a surprisingly high response,
suggesting a clear need to employ more
rigorous upront assessment o potential
project risks.
Margin erosion identified at bidding stage
Region Size
Yes
Not sure
No
Not Relevant
*Low base findings are directional in nature
Percentages might not add up to 100 due to rounding
Source: KPMG International, 2011
More than
USD5 billion
(n=23*)
USD1-5 billion
(n=58)
Less than
USD1 billion
(n=79)
EMEA
(n=84)
ASPAC
(n=49)
Americas
(n=27*)
Overall
(n=160)
24%
54%
10%
11%
30%
63%
7%
24%
57%
10%
8%
23%
50%
11%
17%
21%
62%
12%
5%
35%
48%
17%
24%
51%
6%
19%
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32 | The great global inrastructure opportunity
Projects under scrutiny
Only 36 percent o the respondentsconsider their project review processesto be very ecient, and the gure orlarger rms is just 30 percent, whichis o some concern given the sizeand complexity o the projects theyundertake and could help explain the
margin erosion mentioned earlier. Thisnding suggests that just a minority
o engineering and constructioncompanies carry out a system-generatedassessment o nancial inormation,which in turn acilitates a qualitativeproject review. Robust, consistent andongoing project analysis is paramount toimproving project management practice
as well as overall project perormance.
Efficiency of project review process
Region Size
Very efficient i.e., largely a review of system-generated financial information
to facilitate qualitative review
Somewhat efficient
Not efficient i.e., information needs to be secured from multiple systems before
performing a qualitative review
Not relevant
*Low base findings are directional in nature
Percentages might not add up to 100 due to rounding
Source: KPMG International, 2011
More than
USD5 billion
(n=23*)
USD1-5 billion
(n=58)
Less than
USD1 billion
(n=79)
EMEA
(n=84)
ASPAC
(n=49)
Americas
(n=27*)
Overall
(n=160)
36%
48%
14%
3%
41%
4%
52%
4%
33%
53%
12%
2%
36%
43%
18%
4%
43%
47%
9%
2%
30%
52%
9%
9%
32%
47%
19%
3%
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The great global inrastructure opportunity | 33
View Point
Clay GilgeManaging DirectorMajor Projects AdvisoryKPMG in the USE: [email protected]
Continuously improving risk management
In KPMGs rst Global ConstructionSurvey in 2005, risk management wasrated as the single biggest challengeacing engineering and constructioncompanies in their quest to deliver
projects on schedule and on budget.Since that time, the industry has madesubstantial progress including, theinception and growth o the EngineeringConstruction Risk Institute (ECRI), as wellas improved ratings or risk managementquality in subsequent KPMG surveys,suggesting that many organizations nowhave adequate systems and processes inplace to manage risk.
Yet 2011 has still seen a ew well-publicized project ailures, which
indicates a breakdown in some rms
structured risk management. Many othis years respondents say they areunable to exceed their intended marginon projects, suggesting urther room orimproving the way they manage risk.
Businesses do not need more policies,procedures and controls; they needto integrate existing measures into asystem that gives real-time access toproject perormance. This will enablethem to identiy actual and potentialproblems (such as contract execution,change orders or scheduling), andimprove controls to reduce the chanceso a re-occurrence. Such continuouseedback loops can be appliedorganization-wide to raise standards and
benet projects wherever they occur.
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Challenges in emerging markets
While emerging markets representa big opportunity or engineering andconstruction companies, these marketsrequently come with a high degree ouncertainty. The respondents consideraccess to appropriate skilled resourcesas their single biggest concern, ollowedby political risks and cultural dierences.
Interestingly, only 14 percent citevariability o the legal system as amajor risk actor; a number o rms havehad diculties with local legal issuesin emerging markets, so they shouldensure they ully understand how suchactors could impact their business.
Risk factors while doing business with emerging markets
Overall (n=161) Americas (n=27*)
ASPAC (n=49) EMEA (n=85)*Low base findings are directional in nature
Respondents chose top two most important risk factors.
Source: KPMG International, 2011
41%
33%
25%
14%11%
9% 9%
6%
22%
37%
33%
30%
7%
15%
7%
4%
7%
30%
43%
24%
31%
14%
10%
18%
10%
2%
18%
41%
38%
20%
16%
9%
5%
11%
7%
22%
Access
to skilled
resources
Political risks Understanding/
adapting to
cultural
differences
Variability of
legal
system
Repatriation
of capital
and profits
Unstable
labor markets
Foreign
currency
uncertainty
Cross-border
financing
uncertainties
Not relevant
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The great global inrastructure opportunity | 35
View Point
Steven GattAsia Pacic Sector LeadKPMG in AustraliaE: [email protected]
Fears ease over revenue recognition
The latest Exposure Drat (ED) onRevenue rom Contracts with Customers(issued in November 2011) goes someway to addressing the sectors concernsover accounting or long-term contracts.Many contractors now believe that thecriteria in the revised ED will allow them
to identiy the vast majority o contractsas a perormance obligation that can beaccounted or as one integrated pieceo work. And the criteria or determiningwhether control o goods or servicesare transerred continuously havebeen broadened, which should enablerevenue and prots or most contractsto be recognized progressively, leading
to less volatility in earnings. The revisedproposals will also allow recognition overtime based on input methods (e.g., cost)as well as output methods (e.g., surveyso work done).
On the fip side, the criteria or
recognizing claims and variationsare dierent rom those in currentaccounting standards, while the EDis still asking or extensive additionaldisclosure requirements. KPMG workedwith associations around the world tohelp lobby or changes to accountingboards, who have listened to industryinput.
The great global inrastructure opportunity | 35
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Looking orward
The engineering and constructioncompany o the utureKPMGs Global Construction Survey
2012 shows engineering andconstruction executives to be largelyoptimistic about their short-termprospects globally. Over the comingdecades, demand or services shouldremain strong as nations struggle tomeet growing power and inrastructurerequirements. Irrespective o thesource o unding (public or private), thebottom line is: the world needs moreinrastructure, and engineering andconstruction companies are poised to
not only capitalize on this opportunity,
but to take a leadership role in shapinginrastructure or generations to come.
In preparing or an anticipated wave onew projects, the industry should seek toposition itsel appropriately, which meansbuilding eciencies through optimizingcosts, re-thinking tax structures,streamlining supply chains, enhancingIT systems, capitalizing on emergingmarkets and, where necessary, growingthrough mergers and acquisitions.
Embracing such ideas could change the
shape o the sector and o individualcompanies, so we asked the surveyparticipants how they envision theengineering and construction businesso the uture, and received some highlyinsightul responses (see oppositepage).
36 | The great global inrastructure opportunity
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Scale: going global
As one respondent comments: Geographic expansionwill increase, mainly in emerging countries as domestic
and regional markets are perceived as mature.Scaleis necessary to compete globally and to tackle largeenergy and other major inrastructure projects, which inturn creates the diversity to cope with regional volatility.Further consolidation is expected, with an opening up othe M&A market. According to another survey participant,construction companies will become: diversifed andglobal, with more vertical integration. There will be no
middle class to speak o. Small local companies will
survive, but nearly all mid-sized companies will be slowly
acquired by the global leaders.
Range and depth o services: design, build,fnance and operate
In the words o one industry executive, Companieswill oer a wider range o services including ront-
end consultancy/engineering, construction and
maintenance or acilities managementas part o atotal procurement solution. Another comments that:
Large construction companies will have the capabilityto look ater assets over the ull lie cycle. They will have
a broader range o service and specialism.This is likelyto lead to a rise in direct labor, with an associated needor training and management development to builda highly mobile, global workorce, making the sectormore attractive to graduates and new entrants to theworkorce.
Stakeholder management: towards closerrelationships
A survey participant urges the industry to work moreclosely with the public sector on inrastructure andPPPs, emphasizing that: A company needs to be moregovernment-oriented.Reerring to the same issue,another executive eels that PPPs require companies tobe: ... more exible and innovative, exploring alternativeareas o procurement and building a dierent skill base
when involved in contract procurement. Engineering and
construction companies will also have to put equity into
projects.When discussing relationships on a broader
basis, one respondent saw room or improvement:Firms need to work better with the contractors and
become more o a business partner.
Sustainability: an evolving issue
The importance o a sustainable approach to the entireconstruction cycle is succinctly summed up by thisrespondent: Sustainability starts and ends with theconstruction industry. The materials used, the waste
produced and the fnal built environment and thereore
the sector must become leaders in sustainability.
However, regulatory change will also be a big driver obehavior, according to an industry executive, who arguesor engineering and construction companies to play an:active role, since clients mainly in Northern Europe
increasingly demand audited data on sustainability issues/
ratios; thereore companies should actively shape the
discussion.A number o those involved in the surveypoint to the increasing range o opportunities arising romsustainability, including the development o inrastructureor renewable energies and green buildings. However, oneindustry leader noted the need to be pragmatic and eelsthat: The business looks to work in a sustainable way, butit is customers that will drive the agenda and currently
they look at price not sustainability.
The great global inrastructure opportunity | 37
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38 | The great global inrastructure opportunity
About the surveyAll survey responses were gatheredthrough ace-to-ace interviews in
2011 with 161 senior leaders many othem Chie Executive Ocers romleading engineering and constructioncompanies in 27 countries around theworld.
The interviews were carried out bysenior representatives rom KPMGmember rms specializing in theengineering and construction industry,with the questions refecting currentand ongoing concerns expressed byclients o KPMG member rms.
Respondent companies turnoverranged rom less than USD250 millionto more than USD5 billion, with a mix ooperations rom global through regionalto purely domestic.
Regional breakdown of participants
EMEA Americas Asia Pacific
*Low base findings are directional in nature
Percentages might not add up to 100 due to rounding
Source: KPMG International, 2011
More than 5 billion (n=24*)1-5 billion (n=58)
Less than 1 billion (n=79)Overall (n=161)
53%
17%
30%
62%
6%
32%
45%
28%
28%
42%
25%
33%
38 | The great global inrastructure opportunity
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The great global inrastructure opportunity | 39
Less than US$250 million
US$250 million-US$1 billion
US$1-2 billion
US$2-5 billion
US$5 billion+
*Low base findings are directional in nature
Percentages might not add up to 100 due to rounding
Source: KPMG International, 2011
15%
16%
20%
12%
11%
20%
22%
26% 33%
11%
7%
27%
24%
36%
21%
29%
20%
20%
12%
16%
Turnover of participants (USD)
ASPAC (n=49)Americas (n=27*)
EMEA (n=85)Overall (n=161)
The great global inrastructure opportunity | 39
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40 | The great global inrastructure opportunity
Americas (n=27*) ASPAC (n=49)EMEA (n=85)
1-5 billion (n=58) More than 5 billion (n=24*)Less than 1 billion (n=79)
Overall (n=161)
Scope of operations of participants
*Low base findings are directional in nature
Percentages might not add up to 100 due to rounding
Source: KPMG International, 2011
Region
58%27%
15%
63%
7%
30%
76%
8%
16%
78%
16%
5%
57%
21%
22%
33%
17%
50%
Size
Domestic (home country) market primarily Home region primarily Global
64%
18%
18%
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The great global inrastructure opportunity | 41
BookshelA selection o relevant KPMG reports and insights. To access these publications,please visit: www.kpmg.com/building or email us at: [email protected]
Construction Risk in NewNuclear Power Projects Eyes Wide OpenThis report draws on the KPMGexperience, advising on new nuclearbuilds around the world. The report
ocuses on construction risks and sharesexamples o models in new nuclearpower projects. It also discusses othercritical considerations or investors.
Power Sector Developmentin Europe LendersPerspectives 2011A report highlighting the key ndingsrom a survey o top European banks onthe prospects or power inrastructurenancing in Europe.
Financing the growth oyour cityA look at alternative nancingmechanisms and structures or urbaninrastructure nancing. These nancingoptions, including Public PrivatePartnerships (PPP), could help citiesgear up to not only meet the challengeo rapid growth but also become global
cities with world class inrastructure.
Insight Issue 1:Inrastructure 2050In the inaugural issue o Insightmagazine, we looked at the uture oinrastructure and explored why theworld must come together to solve theglobal inrastructure challenge. From
project nancing in Indonesia to urbantransport projects in the UK, Insightprovides a broad scope o local, regionaland global perspectives.
Insight: Urbanization Second EditionThe second edition o Insight exploresthe inrastructure challenges currentlybeing aced by cities, and includes eatureinterviews with key city leaders andprivate sector executives rom around
the world to shed light on how they areresponding to the inrastructure challenge.
Inrastructure 100From KPMG and InrastructureJournal a look at 100 o the mostexciting inrastructure projectsunderway globally. A distinguishedgroup o judges selected thesegame changers rom hundreds osubmissions.
Project Delivery Strategy:Getting it RightWhat are the various project deliveryoptions available to owners? What arethe actors that might infuence theselection o one method over another?This paper explores the options.
Reaction Magazine:Fourth EditionA look at M&A trends rom both anemerging market and establishedmarket company perspective andexamines how M&A activity maychange the shape o the global chemicalindustry over the coming years. Weconsider current trends in the globalconstruction industry and see howtax eciency in the supply chain canprovide a competitive advantage.
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42 | The great global inrastructure opportunity
Powering Ahead 2010:An Outlook or RenewableEnergy M&AA report providing an insight into theglobal M&A activity in renewableenergy. The ndings are based on asurvey o over 250 senior executivesactive in the renewable energy industryworldwide.
Success and Failure in UrbanTransport InrastructureThis joint report with University oLondon College explores the ndingso 19 case studies rom cities aroundthe world, including New York, London,Hong Kong, Singapore, Dublin, Bogota,Manila, Manchester, and Bangkok.
Rail at High Speed: Doinglarge deals in a challengingenvironmentMany countries are preparing and/orimplementing high-speed rail projects.This paper shares lessons learned romwork perormed by KPMG memberrms advising Portugals rst high speedrail project.
Delivering Water InrastructureUsing Private FinanceWe examine the risks and rewards ousing private nance to und waterinrastructure, including how municipalgovernments and potential investorscan benet.
Island economies and theirinrastructure: An outlook2010 and beyondA rst o its kind report on IslandEconomies, providing a comparativeanalysis o the state o the inrastructurechallenges currently being aced byisland economies.
The Roll-out o NextGeneration Networks:Investing or 21st CenturyConnectivityA spotlight report on approaches beingtaken by governments around the worldrelative to the roll-out o high speedbroadband networks.
Think BRIC! Key considerationso investors targeting thepower sectors o the worldslargest emerging economiesA series o publications highlightingmajor trends and challenges shapingthe evolution o the BRICs countriespower sectors over the course o thenext decade.
New on the Horizon: RevenueRecognition or Building &ConstructionThis publication addresses the revisedrevenue proposals, specic to entities inthe Building and Construction sector.
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The great global inrastructure opportunity | 43
KPMGs Global Building & Construction practice
By keeping a constant pulse on the industry, KPMGs
Building & Construction proessionals deliverin-depth knowledge and valuable advice to help companiesadapt accordingly in challenging economic times andbeyond. We understand the complexity o the engineeringand construction industry and have a keen grasp o thebusiness issues and challenges that exist in dierent
market climates. In addition, you can count on our objective
perspective. Our proessionals across the global networkcan help your organization improve business processes,control costs, identiy and mitigate risks, increase visibilityand transparency, maintain regulatory compliance,and identiy growth opportunities through internationalexpansion, merger or acquisition, or joint venture.
2010 Global ConstructionSurvey Adapting to an
Uncertain EnvironmentThis survey highlights the cautiouslyoptimistic outlook o many E&Ccompanies about their immediateprospects and discusses key industryissues and the measures adopted toseize the new opportunities identied.
2008 Global ConstructionSurvey Embracing Change?This survey presents the views o
CEOs and other senior executives onareas impacting the industry, includingresource shortages, risk management,escalating costs, and sustainability.
KPMG INTERNATIONAL
Adapting toan uncertain
environmentGlobalConstructionSurvey2010
kpmg.com
Global Construction Survey 2008
Embracing change?
KPMG INTERNATIONAL
The Global Construction Survey series
This is the sixth year o the KPMG Global Construction Survey. Here are the latest three reports released prior to 2012.They provide a great illustration o how the industry has evolved over the years.
2009 Global ConstructionSurvey Navigating the
Storm Charting a path torecovery?More than 100 senior executives romthe engineering & construction industryresponded to this survey, which ocusedon how organizations were weatheringthe impact o the global nancial crisis.
KPMG INTERNATIONAL
Navigating the stormCharting a path to recovery?
Global Construction Survey 2009
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