Tony Blair's plans to double capital spending by 2004 will create a huge construction boom as the government scrambles to transform public services in time for the next election. Over the next three weeks, in the run up to Building's "Blair's Billions" conference, we throw a spotlight on the government's historic undertaking and analyse how the money will be spent in five key areas. But we kick off by asking, what does it all mean for the industry?
One hundred new hospitals; 650 new schools; 100 new bypasses; 25,000 new social housing homes. Tony Blair has blown the whistle to start the biggest public construction boom since the post-war era. The prime minister has promised to reverse decades of neglect and under-investment, which saw public spending reach a 30-year low last year; in the process, he will be hoping to reserve a place in the history books.

For construction, this represents an unprecedented money-spinning opportunity and a way of riding out the predicted recession. But it also brings onerous responsibility and risk. Blair has staked his reputation on delivering tangible results in time for the next election. Ministers, always on the lookout for a scapegoat, will be quick to blame the industry if classrooms are still covered in scaffolding come polling day.

Architect Mike Nightingale sums up the mood. "It's brilliant that they are spending all this money on the public sector, but it's beholden to everyone in the industry to get the best possible results."

The risks have already been identified. Can an already overstretched industry cope with the workload? Is the government's creaking procurement machinery capable of spending the money? And will rising public opposition to private sector involvement sink the whole project?

But for the time being, worries are banished as the industry gears up for the bonanza. "If you believe the government's numbers, it's significant for the whole industry," says Robert Donald, a construction sector analyst at Schroder Salomon Smith Barney, and a man not known for overstatement.

Donald rattles off a string of figures that point at the vastness of the government's plans. Government capital spending is to double over the next three years from about £18.2bn in 1999/2000 to £39.3bn in 2003/4. In this financial year alone, it will leap 41.8%.

Building output is predicted to grow faster than GDP over the next three years as the government's construction spend – which accounts for 37% of the industry's £68bn annual output – soars. Investors have noticed: the sector's share price has risen 50% since last summer as the promise of bountiful, low-risk government contracts helps make construction appear a relatively safe bet.

Large contractors are set to benefit most, Donald says, tipping Amec, Balfour Beatty, Kier and Mowlem as among those best placed to profit. But Donald cautions firms not to get too carried away. "The greatest amount of losses tend to be made in this type of market," he says.

Donald warns firms not to overstretch themselves by taking on more work than they can handle – or to cut corners in their greed to secure contracts. "Make sure you take enough time to analyse whole-life costs," he advises PFI bidders. Holding on to key people and attracting new staff will also be paramount for firms already feeling the effects of the industry-wide skills shortage.

According to Donald, the bonanza offers a once-in-a-lifetime opportunity for the industry to ditch its historic attachment to low margins and make some real money. "People make more money from margin than volume," he says. "The industry shouldn't be embarrassed about that. It's crazy for it to chase work in this environment; it should sit back and make the customer pay more."

The massive job of gearing up for public sector projects is already driving restructuring and rationalisation. The complexity and cost of bidding for PFI contracts is forcing firms to specialise. Contractor Galliford Try is concentrating its efforts on the emerging PFI further education market. The firm is hoping to emulate the success of Jarvis, which has captured 30% of all PFI schools contracts. The contractor was among the first to spot the emerging market, and has refashioned itself as a PFI "one-stop shop", developing in-house legal, technical and FM expertise and buying a majority stake in a financial consultant.

As government departments move towards framework arrangements and as PFI jobs are increasingly bundled together into large packages, it is becoming clear that small firms are going to struggle to get a look-in. Small architects are particularly concerned that they will lose out, but smarter firms are finding ways round this by forging alliances or merging with one-time rivals.

Healthcare specialist Nightingale Associates has linked up with firms in the USA, Australia and South Africa to get the capacity it needs to bid for PFI hospitals. The firm can now call on 400 architects worldwide.

Two years ago, Holford Associates and Abbey Hanson Rowe merged to form Abbey Holford Rowe, achieving the critical mass it needed to pitch for the large PFI jobs it saw coming. The resulting 350-strong firm has so far scooped 22 PFI projects – more than any other architect. "You need cash flow to underwrite a PFI bid," says AHR partner Brian Johnson. "Generally, I think the market will rationalise to larger players."

The government, too, is undergoing a transformation as it attempts to streamline its convoluted procurement processes. A series of initiatives is in the pipeline to ensure the public sector practices what it preaches in pursuit of best value and Egan-style efficiency (see interview, right). And the Treasury is anxious to banish the anti-spending habits of front line Whitehall departments, which last year undershot their budgets by a massive £6bn.

Ministers are also beginning to realise that history will judge them not only on the quantity of projects they bring on stream, but also the quality. The early PFI projects in particular have been heavily criticised for being poorly designed. Last year, Blair personally intervened, launching his "Better Public Buildings" initiative and exhorting his departments to commission projects comparable with the great Victorian and Edwardian eras of public building.

Blair's involvement has substantially enhanced the clout of the Commission for Architecture and the Built Environment, a body that now wields enormous influence in government, and which the industry and government clients ignore at their peril.

CABE is advising the Office of Government Commerce on improving procurement policy to get higher quality buildings.

"CABE has concerns, and rightly so," says Abbey Holford Rowe's Johnson. "What we don't want is a repeat of the 1960s. You can drive past a school and know it was built in the 1960s. We don't want future generations to drive past a school and know our generation built it."

The challenge has been set. All eyes are on the industry to see whether it is up to the job.

This week

social housing
Expenditure is set to rise by nearly 50% over the next three years

Next week

The NHS budget will grow by 50% in the next five years, with extensive new build planned
The government is pumping £8.5bn into the sector over the next three years

21 september

A total overhaul is promised with £180bn earmarked under the 10-year plan
Law and order
Law courts, prisons and police stations are to undergo major redevelopment

25 september: blair’s billions

Building’s major conference on all aspects of the spend. Tickets: 0870-873 0050.