Construction has long been one of the UK economy’s bedrock sectors. Its 6% share of GDP is the same now as it was a century ago. Its output is estimated at £116bn per year. It employs some 2.3m people or around 7% of the workforce. It is estimated to have created over 75% of the nation’s capital assets, an astonishing value of some £3.6tn.
Like all sectors, construction has flaws in its business model. It suffers from being volume-driven and overly-competitive, so it is plagued by self-destruction pricing and wafer-thin profit margins. The resultant financial pain tends to be transferred down its supply chain, particularly to the legions of subcontractors, mainly through the medium of contract disputes.
The quality and quantity of training available is often problematical, which is particularly relevant in the light of the rapid changes taking place as environmental and sustainability issues, advances in materials and construction techniques and the growing use of digital technology all play an ever more important role in the industry’s future.
Financial stability is a rare commodity. Through both good and bad economic times, around 20% of all UK insolvencies have been of construction companies, in stark contrast to its far lower share of GDP.
Research by the financial health monitoring specialists, Company Watch has identified that the sector had very poor financial characteristics even before the pandemic started. Out of almost 180,000 construction businesses registered at Companies House, over a third (60,750) are in the Company Watch warning area with a health rating (H-Score®) of 25 or less out of a maximum of a hundred, indicating a one in four of failing within three years. Nine percent (15,722) of businesses are zombies, with negative balance sheets that fail one of the two basic solvency tests set by the Insolvency Act.
Despite severe disruption in the early stages of the pandemic, the sector has recovered well and was the only part of the economy to show GDP growth in January 2021. Nevertheless, it still has some catching up to do with a net drop of 2.6% in output since February 2020.
Business challenges faced by the Construction sector
- Continuing excess competition restricting profit margins
- Poor contract dispute resolution
- Repairing balance sheets damaged by losses incurred during the pandemic
- Labour and skill shortages caused by the Brexit and Covid-driven exodus from the UK, which has raised labour rates and increased training needs
- Adverse workforce demographics caused by the high percentage of experienced older workers who will retire in the near term
- Poor workforce productivity as the older generation leaves and is replaced by less experienced younger workers
- Declining work pipelines as the Covid backlog is worked out. New order intake in January 2021 was 6.4% below the level in February 2020
- Material supply issues caused by Brexit, the pandemic and global shipping disruption, delaying contract completion and raising costs
- Development and use of new, more advanced materials, creating increased training requirements
- The introduction of modern methods of construction (MMC) requiring more on-site mechanical handling, fewer traditional on-site trades and significant off-site factory skills, again requiring more training and staff development
- The greater use of information and communication technology (ICT) to drive more sophisticated integrated information systems. In 2018, construction was the second least digitalised sector worldwide
- Increased focus on environmental and sustainability issues, which raises costs and increases contract complexity
- Diversity and inclusion issues, creating recruitment challenges and a need for a fundamental change to some aspects of the sector’s traditional culture
- Health & safety standards – construction had the highest number of H&S-related accidents in 2019
- IR 35 compliance, requiring the ‘end hirer’ to decide if contractors are inside or outside the complex regulations and to account for the tax and national insurance liabilities of those deemed ‘inside’
- Understanding and implementing the domestic reverse VAT charge introduced from March 2021, which will create additional administrative burdens and software requirements
Helping businesses in the Construction sector
Partners and employees across the Group at Opus have extensive experience and knowledge of the construction sector.
Ways in which we support companies, business owners and their management:
- Carrying out comprehensive business reviews to assess and advise on a broad range of financial and commercial issues
- Assisting with financial forecasting
- Reviewing financial and operational systems
- Advising and supporting in negotiations with key stakeholders, such as lenders, suppliers and credit insurers
- Raising new funding, either as equity or borrowing facilities.
- Providing strategic advice on changes to the business model or on managing growth.
- Seeking out acquisition and merger opportunities.
- Advising on exit routes such as the sale of the all or part of the business.
- Undertaking forensic investigations where circumstances dictate.
- Planning and assisting with restructuring projects.
- Offering independent advice on solvency issues.
Market Sector Report
The UK Construction Market – Before & after coronavirus
So much has changed over the past hundred years, but the construction sector has always been a steady contributor to the UK economy. In this report, we look at the shape of this market and the way forward.Read the Report