Fabrication business valuation

How does a fabrication shop make its money?

Most fabricators are job shops. Every job is quoted, won or lost, then built to someone else's drawings. Revenue is lumpy, the mix changes month to month, and profit depends on three things going right at once: pricing the job correctly, buying the steel at the price the quote assumed, and getting the work through the shop in the hours allowed.

That makes the annual profit and loss a poor guide on its own. A year with two large structural jobs can look excellent and a year of small repair work can look thin, without either showing what the business really earns. We look underneath the annual numbers at:

• Work mix. Structural steel for buildings, plate work and tanks, mining wear parts and repairs, architectural metalwork and sheet metal each have their own margins and their own customers.
• Shop hours and recovery. How many hours the workshop sells against how many it pays for, and the effective hourly rate achieved once each job is finished.
• Repeat customers. A fabricator with a steady flow of work from the same builders, maintenance teams or equipment makers is a different business from one that wins a different tender every month.
• Bought-in processes. Galvanising, blasting and painting, laser cutting and transport are often outsourced. Their cost and reliability feed straight into margin and delivery dates.

Quoted margin versus delivered margin

The single most useful report a fabricator can give us is a list of completed jobs showing the quoted price, the estimated cost and the actual cost. It shows whether the business makes the margin it prices for. Owners are sometimes surprised by what it reveals.

We look for patterns: margins consistently below quote on one type of work, losses concentrated on the larger jobs, variations that were built but never charged, and rework that never made it onto a job card. A business with a reliable estimate-to-actual record supports a higher value, because a buyer can trust the quotes it inherits and the pricing it will keep using. The illustrative example on this page shows how quickly a healthy quoted margin can erode.

What happens to value when the owner is the estimator?

In many fabrication businesses the founder still prices every significant job. They read the drawings, know what the shop can turn out in a week, remember what the last similar job cost and know which builders pay on time. That knowledge is the margin.

It is also the largest single risk a buyer sees. If the estimator leaves, the next owner is quoting blind. Buyers respond by lowering the price, deferring part of it, or requiring the owner to stay on for a year or two. What reduces the risk:

• an estimating system or spreadsheet with documented rates per tonne, per metre of weld or per shop hour, rather than figures in one person's head
• a second person who has quoted under supervision long enough to have a record of their own
• job costing that feeds actual results back into the rates
• customer relationships held by more than one person in the business

We reflect owner dependency in the risk assessment and, where it is severe, in the method itself. Our succession and estate valuation page covers planning an exit around it.

How exposed are margins to the steel price?

Steel is usually the largest single cost on a job. Prices move with global markets and the exchange rate, and a fabricator quoting fixed prices carries that movement between the quote and the purchase. On a long-lead job the gap can be months.

We look at how the business protects itself:

• how long quotes stay valid, and whether material is ordered on award or later
• whether larger contracts carry rise-and-fall provisions for steel
• how much steel is held in stock, at what cost, and whether stock gains or losses have flattered or depressed recent results
• how quickly supplier increases have been passed on to customers in the past

When steel prices have moved sharply during the years we are looking at, part of the reported margin may be a stock holding gain or loss rather than a result the business can repeat. We separate the two where the records allow.

AS/NZS 5131, AS/NZS ISO 3834 and why certification matters

Structural steelwork in Australia is designed by engineers to AS 4100 Steel structures, and fabricated and erected to AS/NZS 5131 Structural steelwork: Fabrication and erection. AS/NZS 5131 sets risk-based construction categories, and the engineer selects the category for each project. Requirements for structural welding are set by AS/NZS 1554.1 Structural steel welding, Part 1: Welding of steel structures.

Under the National Structural Steelwork Compliance Scheme, which is voluntary, Steelwork Compliance Australia audits fabricators and certifies them to a construction category. Separately, AS/NZS ISO 3834 Quality requirements for fusion welding of metallic materials is used by fabricators to show control of the welding process, and many larger clients ask for it.

For value, certification works like a ticket to a market. It lets the business tender for commercial, infrastructure and resources work where certification is specified, and it supports margins because fewer shops can bid. It also costs money: audits, a welding supervisor, procedure qualification, inspection and test plans, and documentation on every job. We check what is held, what it costs to keep, whether recent audits raised issues, and how much of the revenue actually depends on it.

Cranes, floor space and workshop capacity

A fabrication shop's capacity is physical. The safe working load of the overhead cranes, the hook height, the length of the bays, the laydown area and the size of the doors decide the largest piece the business can build and move. A shop limited to light cranes cannot take on heavy structural or plate work, however good its people are.

We look at utilisation (how full the workshop is in a typical week), the machines that set throughput, such as beam lines, plasma or laser cutting tables, press brakes, rolls and saws, their age and replacement cost, and whether growth would need more space or another shift. A shop running at capacity with old cranes and a lease ending in two years has a capex and relocation bill sitting behind its profit.

The premises lease often matters more than owners expect. Heavy cranes and thickened slabs are expensive to move, so the remaining term and options, and whether the cranes belong to the landlord or the business, can affect value directly. The machines themselves are not added on top of the earnings they produce; our article on plant and equipment explains why.

Welders, supervisors and the workshop floor

Skilled boilermakers and welders are hard to find in most regions, and a fabricator's capacity is limited by the qualified hands it can keep. We look at headcount and staff turnover, the balance between employees and labour hire, overtime levels, apprentices coming through, and who holds the welding supervisor role that the certifications depend on.

Many fabrication employees are covered by the Manufacturing and Associated Industries and Occupations Award 2020, which extends to metal work and the manufacture of metal products, or by an enterprise agreement. Accrued annual and long service leave for transferring staff is a real liability and is dealt with in the price.

Putting a value on a fabrication business

Capitalisation of maintainable earnings is the usual primary method, with earnings averaged over enough years to smooth out the large jobs and struck after a realistic allowance for replacing cutting tables, cranes, welding plant and forklifts. Where earnings are thin relative to the plant and stock, we cross-check against the net value of the tangible assets, because some fabrication businesses are worth more as a workshop than as a going concern. The methods are explained on our how we value page.

Customer concentration is common: a fabricator may do most of its work for two or three builders or a single mine. We weigh that against how long the relationships have run and whether the work is tendered each time. See our article on customer concentration, and our engineering page if design and project management are a large part of what the business sells.

We can usually form a view of the workshop from the plant register and a conversation with whoever runs the floor. If the cranes or plant need to be seen in person, we say so when scoping and agree any visit and its cost before starting. Job lists, drawings and financials are shared through the private upload link on your matter rather than by email, and they stay confidential.