2025 Engineering and Construction Industry Outlook

3. Financial considerations: E&C firms strive to drive growth from strategic divestitures, capital allocation strategies, and the growing role of private equity

Against the backdrop of cost overruns due to elevated inflation and interest rates, E&C companies are expected to focus on creating value and sustaining growth through strategic divestitures, refined capital allocation, cash flow optimization, and increased private equity (PE) investments in 2025.

Large construction firms³¹ may optimize their portfolios by divesting noncore assets, cleaning up balance sheets, and reinvesting in core business areas to enhance overall performance. Companies may limit financing for or completely exit noncore business units or product lines.³² They may also look to optimize their geographic expansion. These strategies aim to enhance margins and drive targeted growth.

Many large firms may consider shifting from lump-sum contracts to reimbursable projects to improve earnings predictability and cash flow. Companies may also implement strategic cost reduction programs from shared service delivery to strategic sourcing and category management for materials and services to optimize cash flow. Owners are increasingly prioritizing projects in industries that promise higher returns on investment while minimizing short-term risks.³³

Somewhat conversely, smaller firms will likely seek market share and revenue growth, attracting interest from large firms as well as PE investors, presenting new opportunities for expansion.

Mergers and acquisitions activity will likely be an important growth strategy for both large and small firms. Between August 2023 and July 2024, there were 528 completed M&A deals in the construction industry, totaling more than US$38 billion, which is more than three times the deal value from the previous year.³⁴

Deloitte’s analysis of major deals revealed that construction firms are integrating vertically as well as horizontally. Vertical integration deals include acquiring companies within the supply chain (such as building products manufacturers and their suppliers) to enhance control over production and distribution. Horizontal integration deals include acquiring competitors or companies at the same stage of the value chain. These deals may also help companies consolidate market presence or diversify offerings by target product lines such as building products, cement and aggregates, steel, solutions for heating, ventilation and air conditioning, clean room solutions, and homebuilding services.

With increased governmental spending in sectors such as transportation, broadband, and clean energy, PE firms may pursue more buying opportunities in the construction sector.³⁵ Between August 2023 and July 2024, there were 112 completed M&A deals in the construction industry from PE investors, totaling more than US$14 billion, almost double the deal value in the previous year.³⁶ Deloitte’s analysis of major deals by PE firms in the construction industry indicates that they are primarily focused on strategic expansion and operational and technological enhancements. In the coming year, PE firms may seek to expand their portfolios and industry footprint by investing in construction technologies and automation. Solar technology, renewable energy, and clean energy construction projects also are expected to be prime prospects for PE investors.

As prices of construction materials have moderated in the last few months, E&C firms may find it easier to manage costs if this trend continues through 2025.³⁷ Effective resource allocation will be important as firms emphasize strategic investments to achieve sustainable results.