Wasting a good crisis

Growth is now the biggest problem for the construction sector. Alright, that is a bold statement and some in the construction industry may be sceptical. Bruised by five years of recession and at least one false dawn such scepticism is understandable, but, dare I say, misplaced.  

During last month’s Budget, the chancellor unveiled revised growth forecasts for the UK economy: 2.7% for this year and 2.3% for 2015. Last month’s Markit/CIPS survey showed that civil construction output in February was at its highest since April 2007. The trend is clear: demand is rising and it is already swamping the capacity of the industry.     

To respond effectively, the industry first needs to understand the nature of that demand, and second, it needs to recognise that the demand is likely to lift significantly across all segments of the industry.

So far, residential housing has led the recovery and there is no prospect of that market cooling over the next few years. At the moment, both main political parties are heavily focused on policies to increase the rate of housebuilding, and in the Budget the government switched from a largely demand-based approach to embracing supply-side interventions too, in particular by creating a £500m Builders’ Finance Fund to help SME housebuilders.

But there is still plenty to do. The government has set a target of building 240,000 houses a year but the simple truth is that the UK hasn’t managed that at any time since the forced collapse of the local authority building programme. Garden cities may be part of the answer but not on the current tentative basis of waiting for local authorities to bring forward plans. I expect our political parties to fight out alternative views of the solution in their election manifestos.

This is the point in the industry lifecycle when main contractors fail, victims of rising subcontractor prices on already committed contracts

Commercial construction is by definition the industry segment most driven by general economic sentiment and this is where history suggests growth in construction demand will jump most sharply as confidence improves, as already seen over the last two months. It is also the segment least affected by government policy so can be expected to ride out any hiatus through an election period. Until 2007, public sector construction demand had generally been slightly out of sync with private demand, moderating both the lows and the highs. But it seems most likely that the next five years will see both public and private demand for capital infrastructure relentlessly rising, creating massive opportunities but also pressure on the industry.

Finally, in civil engineering the future is pretty clear - it’s a long-term game and you can forecast with reasonable confidence five or even 10 years ahead subject only to policy changes. Our own recent analysis suggests a market worth £45bn by 2016, comprising £24bn (53%) in energy projects and £14bn (31%) in transport projects. Key drivers will be the 18GW of off-shore wind projects expected to be installed by 2020 (representing about 18% of UK energy generating capacity at that time) and the extensive road and rail investment programmes.

The industry challenge is how to respond to rising demand across all segments, when capacity is 20% below its peak in 2007 and there is a shortage of skilled labour. The pressure has been felt already by main contractors over recent months as subcontractor availability has declined and rates have risen. Historically this is the point in the industry lifecycle when main contractors fail, victims of rising subcontractor prices on already committed turnkey contracts and overtrading in critical elements of their supply chain.

“Never waste a good crisis” was the title of the 2009 Constructing Excellence report, but alas the industry has, with a few exceptions, done precisely that, and many companies are in no shape to respond to the good times ahead. But there is still time and there are three things in particular I would argue each company in the sector should now do:

First, establish a best in class apprenticeship scheme and start building a workforce with the skills for the future. If we all try to rely on everyone else we will continue to have a skills shortage.

Next, review the entire company business model from a BIM-dominated perspective and work out how to succeed in that world, because it will be very different from how the industry, and each company, works today.

And lastly, invest in new Cloud-based people and asset management technologies, which are particularly suited to the disparate workforces and sites of construction, and offer much lower cost technology for what will remain a margin-constrained business (however much we may hope otherwise).

If each business takes these steps now, we will look back on 2014 as the turning point of the industry and the start of a decade of unprecedented growth. Fail to do so and it will just be a decade of hard work and an open invitation to the government and overseas buyers to intervene and put our market in order.  

Richard Threlfall is head of infrastructure, building & construction, KPMG