Morgan Sindall underscored the continued pressure on the British construction industry with a 34 per cent fall in pre-tax profits as higher supply costs and a host of troublesome contracts took their toll.

The infrastructure company, which is working on the tunnelling for the new London Crossrail train service, said conditions in the year to December 31 2013 remained “challenging” with margins under pressure from a rise in labour and materials costs and tough competition in the market.

Although a surge in the number of homes being built has boosted official figures for the industry, companies that focus on infrastructure, affordable housing, repairs and commercial projects are still struggling to recover from the recession.

According to the Office for National Statistics, construction output in the three months to December rose for the third consecutive quarter but it remains 11 per cent below where it was six years ago.

Construction experts warn that this is the time when many contractors are most vulnerable as they are locked into deals negotiated at low prices during the peak of the recession at the same time as facing rising energy and materials costs.

Noble Francis, economics director at the Construction Products Association, which represents manufacturers and suppliers in the £40bn construction products industry, said tender prices started to rise at the end of last year but “they are unlikely to benefit until the second half of this year and, primarily, 2015”.

“The majority of these firms are still working on projects that they won at relative low prices 12-18 months ago, yet costs are rising now, largely owing to increased labour, energy and transport costs. As a result, most contractors reported a fall in profit margins in the fourth quarter despite the improving demand over the past 12 months,” he said.

Morgan Sindall, which employs 5,700 staff, has been reducing its exposure to government contracts, which accounts for roughly half of sales. Despite this it is competing for work on the Thames Tideway sewage project in London, after getting through the first stage of the competition.

Adjusted pre-tax profit fell to £31.3m in the year ended December 31 from £47.1m a year earlier. Revenue rose 2 per cent to £2.09bn. Adjusted gross margins reduced 90 basis points to 8.2 per cent.

Morgan Sindall’s construction and infrastructure division accounts for more than half of total revenue. Operating profit in the division fell 36 per cent to £12.7m pounds as competitive pressures and cost inflation cut operating margin to 1 per cent. The order book stood at £2.4bn as of December 31, an increase of 8 per cent from a year earlier.

Separately, rival Kier Group announced the departure in June of Paul Sheffield as chief executive after 30 years in the company. Haydn Mursell, currently group finance director, will take his place at the helm of the business.

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