Sector - Employment
Futureproofing the UK construction sector
Renny Borhan, Partner and Chief Executive of HKA, and Toby Hunt, Partner and Head of Europe at HKA, have been following trends and disruptions that have impacted the UK construction sector, and discuss how two major disruptions to the industry will influence supply chain issues and investment in the field in the future.
Over the last four years, the UK construction sector has endured two unprecedented and concurrent disruptions, Brexit and the COVID-19 pandemic. Each disruption brought its own unique challenges, impacting health, economic, and political ecosystems in ways never experienced. At a macro level, the uncertainty caused by a prolonged Brexit, coupled with the impact of COVID-19 pandemic led to reduced economic activity across the globe.
The impacts of these crises were destined to strike the UK construction sector given its intrinsic characteristics. The sector is widely known for systemic weaknesses, fragmentation, a multi-tiered rigid structure, low profit margins (typically 2% compared with an average of 30% in other industries), poor cashflow, and generally weak balance sheets. The high level of intellectual property often locked in lower levels of the supply chain, together with a slow adoption of digital, has left the sector poorly equipped to weather significant disruptions. As a result, the UK construction output dropped by a record 45% in 2020, with the impact varying across different subsectors; for example, despite the overall drop private housing surpassed pre-pandemic output due to strong private investment.
The impact on the construction supply chain
Both Brexit and the COVID-19 pandemic struck the construction sector in two key areas of its supply chain: material and labour.
Despite the decision to leave the second largest trade block in the world after RCEP, UK is still EU’s largest trading partner, accounting for more than 54% of all imported goods and 49% of all exports in 2018. A large proportion of the trade between EU and UK are in the form of intermediary products, an indicator of the high degree of interconnectedness between UK and EU supply chains.
Any disruption to supply into the UK, even if demand for construction materials were to stay constant, increases the supply chain costs. As COVID-19 restrictions ease and economic activity resumes, we see a shortage of supply in materials such as cement, timber, steel, and paint due to higher demand. The Office for National Statistics is projecting a rise of around 8% in construction material prices, with some such as timber set to increase by double. Given a substantial amount of building components and materials are imported, there is much uncertainty around short to medium term procurement costs that are linked to GBP and future tariff structures yet to be finalised.
Scarcity of skilled labour is another risk facing the industry. The new points-based UK immigration scheme that came into effect from 1 January 2021 could disrupt the supply of high-skilled labour, as 8-10% of the sector’s workforce are estimated to be EU migrants. Any loss of access to this talent pool will exacerbate the current skills shortage in the UK, negatively impacting delivery of key infrastructure and resulting in an increase in wage costs in an already low-margin industry.
These facts reiterate the need for the industry to accelerate its evolution. As the post-Brexit environment becomes clearer and the COVID-19 pandemic subsides, UK construction firms should exploit opportunities to enhance and strengthen their businesses in the short term, whilst making investment in technology and talent a long-term commitment.
Investing in a brighter future
We are now seeing the green shoots of recovery in the UK construction sector. Construction output grew by 5.1% in the three months to April 2021, compared with the previous three-month period, driven by a 5.2% increase in new work and 4.9% increase in maintenance works.
Construction output now stands slightly above its pre-pandemic February 2020 level. According to current estimates, UK construction output is expected to stand at 4.3% in 12 months’ time and is projected to trend around 3.8% in 2022 and 2.5% in 2023.
We believe that this is the time to invest in the sector, in order to safeguard against future disruptions and potentially unlock an estimated £190bn in annual global profit tied in intrinsic deficiencies. The change is forthcoming and inevitable, and those who embrace the change share the benefits of a brighter, smarter sector in the future.
1. Enhancing sector productivity and collaboration
Construction sector productivity has not changed substantially since the 1970s. External factors combined with organic, fragmented, complex sectoral dynamics, and structural risk aversion have made the much-needed evolution difficult. The sector represents circa 7% of the UK’s GDP, but it has seen a productivity annual growth of just 1% for the past two decades. Project overruns are common, and overall earnings before interest and taxes (EBIT) are estimated to be around 5%.
With the construction sector being a key pillar of economic performance, the World Economic Forum estimates that a rise in the global construction sector’s productivity of just 1% could result in savings of £72bn a year.
We see product-, outcome-based, and customer-centric approaches in a more collaborative environment as key productivity enablers for the sector. The sector’s collective focus should shift to early detection and correction of divergences. Risks such as delays, labour shortages, supply chain risks, evolving sustainability regulations, and an increasingly complex insurance market should be adequately understood and properly allocated within robust contracts. We are encouraged by current move towards flexible pricing mechanisms with a greater emphasis on collaboration, programming, and monitoring approach similar to that under the NEC framework.
2. Protecting and improving liquidity
Compared to other industries, the construction sector generally experiences a proportionally greater number of insolvencies due to suboptimal cashflow. The sector has a reputation for significant supply chain risks and costs, and comparatively longer collections cycles.
Brexit and COVID-19 brought the importance of cash and liquidity into focus. Before COVID-19, the UK construction sector reported 3,502 insolvencies in 2019, the highest of any sector. Between March 2020 and Q2, 2021, more than 1,600 firms in the UK construction sector became insolvent. It is worth noting that the number of firms collapsing into liquidation since the beginning of the COVID-19 pandemic outstripped those in hospitality and retail, the two sectors believed to have been impacted the most by the pandemic.
In our experience, construction firms could gain full visibility over their commitments through effective cashflow monitoring and forecasting, enabled by strong and well-drafted contracts. Most importantly, everyone within the business including the frontline managers must be trained and prepared to enforce the contracts proactively, collaboratively, and rapidly.
A stronger cash position provides a buffer against unforeseen disruptions and fluctuating supply chain costs. It improves operational resilience and frees up working capital that can then be invested in the business, technology, and most importantly, talent.
3. Harnessing the power of data and technology
Construction is a complex process, during which large amounts of data is generated. The data is then linked together to present meaningful information for different parties at different stages of the lifecycle from inception to operations. Historically, the entire process has been managed by professionals, exposing the process to human error, laggard intervention, and misinterpretation.
The HKA CRUX Insight 2020 examined 1,185 projects with a combined capital value of £1.3tn. For these projects, cumulative value of sums in dispute exceeded £25.4bn. On average, claimed values reached as high as 56% of planned capital cost. Changes in scope and design-related problems were identified as primary root-causes. Other recurring causes were poor management of third parties, contractual issues, and workmanship deficiencies.
Many of these risk factors could be mitigated using technologies such as predictive data analytics, artificial intelligence, cognitive applications, and process automation to inform better decisions and enable timely interventions.
Technology is evolving fast and is boosting productivity within the sector to a limited extent. However, its scaled use could truly transform the industry, minimise human errors, and boost productivity and collaboration.
In our experience, the key challenge remains the availability and quality of data. We see this not as a deterrent, but as an incentive to accelerate the uptake and implementation of data analytics and technology-based solutions in the industry. Sector leaders should find ways to capture, store, and synthesise data that is generated daily in projects, even if the apparent value might not yet be clear. This requires a strategy that enables a digital core to maximise both analytical insights for the customers, whilst delivering internal efficiencies.
We acknowledge that meaningful and ambitious investment in digital is a seismic mind-shift for the sector and a quick return on investment is not to be expected. However, there is little doubt that digital disruption is already here with new construction materials, digitisation of products and processes, and smart digital platforms. There is evidence to suggest that those who harness the power of data analytics and technology sustain the downturns much better than their peers, and outperform the industry average in the long term. There should lie our focus as leaders.
4. Investing in people and talent
Technology-based enablers and data analytics are useless without the skilled people who know how to plan, capture, and interpret the data. We believe that the construction sector will rely heavily on human-based skills for the foreseeable future, and sector leaders must invest in developing and attracting the right talent.
The domestic skills shortage has been a growing concern for the sector. In January 2020 just before the emergence of COVID-19 crisis, the Royal Institute of Chartered Surveyors (RICS) estimated the shortfall in the number of skilled construction workers in the UK was at its highest since 2007. RICS further reported that to make up for the shortfall, a further 200,000 workers would need to be recruited in 2020.
In addition to the uncertainties caused by Brexit, the other key reason for the skill shortage in the UK construction sector is an ageing workforce. As construction professionals reach retirement age, fewer people are entering the industry to replace them. In Q3 of 2020, construction vacancies increased by 213.4%. Despite the massive number of job postings, the sector had a quarter-on-quarter 53.9% decline in applications per vacancy.
We therefore believe that construction firms across all disciplines should invest heavily in talent and workforce development. McKinsey research shows that investment in talent typically yields positive economic returns and an uplift as much as 12%.
The approach should include more apprenticeship opportunities and more engagement with young people as early as school and college years. In the short term, skill shortage could increase due to historical underinvestment and recent disruptions. However with a deliberate, collective focus, the domestic skilled talent pool would grow and lead to less reliance on skilled migration, safeguarding the longevity of the sector in the UK.
When it comes to talent, HM Government’s Industrial Strategy: Construction 2025 portrays the vision in which the sector is: “A diverse group of multi-talented people, operating under considerably safer and healthier conditions, that has become a sector of choice for young people inspiring them into rewarding professional and vocational career”.
We believe that this is the time for the industry and the UK Government to work more collaboratively and find alternate ways for attracting and developing younger professionals, who, we believe, are the construction sector’s future.
If you would like to read more stories like this, then please click here
More Employment Features
- Now its Time for Construction to Seriously Consider Flexible Working
15 Oct 21
Construction needs to make itself more attractive to new entrants or face some potentially difficult consequences.
- Six Months Since Brexit: The Government Needs to Open the Door for Start-ups
30 Sep 21
Sohan Panesar writes about how the UK Government should open the door for start ups in the six months since the United Kingdom left the
- UK’s Post-Pandemic Recovery Under Threat by Construction Skills Drain
9 Aug 21
Helen Booth of HomeServe plc, is calling on more to be done to help the UK recover from Covid, and the construction skills drain