Construction's fortunes: A sea change

In 2018 the construction industry will experience its slowest growth in six years – that is the depressing forecast to come from the Construction Products Association, which this week announced that output is expected increase by a meagre 0.7%. This is a downward revision from previous forecasts of 1.3%. And the culprits for this underwhelming performance? A slowing UK economy, declining real wages and rising construction costs.

The commercial and industrial sectors are the most vulnerable, not surprisingly. As the CPA points out, they are most reliant on upfront investment, often from international investors seeking long-term returns. While much of the hope for next year’s growth rests on the private housing sector continuing to outperform all others, that comes with a health warning that the drive to increase residential numbers is too dependent on Help to Buy loans.

Given this backdrop, infrastructure investment is going to be vital – the CPA’s Noble Francis is clear that the government must stick to its pledges to fund projects such as HS2 and the Thames Tideway Tunnel. These are not just “nice to haves”; without them, he warns, construction output will actually fall by 1% in 2018.

It is particularly worrying that the CPA used its announcement this week to highlight concerns about rising costs on and delays to major infrastructure projects

So it is particularly worrying that the CPA used its announcement this week to highlight concerns about rising costs on and delays to major infrastructure projects, which have the unwelcome effect of creating uncertainty in the sector. Specifically, the CPA says it is no longer including the new nuclear power station at Hinkley Point C in its forecasts, presumably because the delays the project has encountered make it too much of a risk to rely upon. That’s an £18bn project being factored out of a £100bn industry – a mighty chunk.

It’s not just the CPA taking a bleak outlook. In this week’s Market forecast (see page 40), Aecom’s Michael Hubbard points to stagflation – a combination of high inflation and slowing growth – as an increasingly real prospect for construction. Activity is definitely slowing, and this downward trend for construction workloads is closely connected, as it almost always is, with the UK’s wider economic slowdown.

But of course forecasts do not provide the full picture – as Hubbard argues, output levels were at record highs at the start of the year, so any slowdown is from a relatively positive position. And many individual companies are showing their resilience in these uncertain times and, in some cases, appear to be thriving. Take, for example, the news this week of Morgan Sindall’s first half-year profit which has exceeded expectations, rising by an impressive 50% to £23.1m.

But even Morgan Sindall is operating on margins of just 1.1%, albeit targeting double that in four years. Other contractors, such as Balfour Beatty and ISG, have said they want margins of more like 5%, even if Building’s latest Top 150 contractors league tables show that that while margins have increased slightly since the previous results, the average contractor is still struggling to hit the 2% mark.

There needs to be a change of mindset that rejects “the way things have always been done” and embraces new solutions that offer sustainable ways of doing business

Opinions differ over how realistic ambitious targets of 5% and above are, but the strategy adopted by CEO John Morgan of focusing on margin growth rather than turnover is certainly one way to de-risk how companies operate in this market.

Clearly, the industry as a whole is not out of the woods yet. Cast’s Mark Farmer has warned that now is a crucial time and construction companies should not be tempted to put in low tenders as “loss leaders” simply to win work – this was a mistake made by many during the last recession, the fallout from which is still being felt. Just looking at the recent spate of disappointing results from major contractors, Carillion being the most shocking, tells you all is not well in our industry and that many are burdened by underperforming contracts.

While most prudent firms will no doubt be minded to take a cautious approach to tendering, the problem is that it can just take a few risk-takers to bid at unrealistic prices to prompt a race to the bottom. This is nothing new, but as Mark Farmer points out (see page 29), the enormous demographic and societal challenges facing the industry means that it cannot continue just as before. There needs to be a change of mindset that rejects “the way things have always been done” and embraces new solutions that offer sustainable ways of doing business that can result in both acceptable margins for companies and reasonable prices for clients.

While that’s no small challenge, it is at least a positive one to contemplate while the magazine takes its week-long summer break. Also in this issue, we have some “staycation” recommendations from industry professionals keen to avoid airport queues, as well as a review of beach huts that subvert the stereotype. We hope you enjoy our summer offerings – we’ll be back in print on Friday 25 August, but you can read breaking news and other coverage as usual on our website.

Chloë McCulloch, managing editor