The UK Construction Market – Before & after coronavirus
The Shape of the Market
It is a relatively high pay sector. Overall, a construction worker earns 5% more than the UK average and those who qualify as lower paid workers earn 11% more than their counterparts in the rest of the economy.
Like all sectors, construction has flaws in its business model. Much of it has long been characterised as a volume-driven, overly-competitive industry plagued by suicide pricing and wafer-thin profit margins. A little like food retailing, there has been a tendency for commercial pain to be transferred down the supply chain, particularly in this case to subcontractors.
Financial Characteristics
Financial stability is a rare commodity. For many years and in both good and bad economic times, around 20% of all UK insolvencies have been 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) were in the Company Watch warning area with a health rating (H-Score®) of 25 or less out of a maximum of a hundred. Statistics for the past twenty years confirm that at least one in four of these businesses will fail or need a major financial restructuring during the next three years. The average H-Score of the whole sector is only 42 out of a hundred, which is well below par. Nine percent or 15,722 businesses are zombies, with negative balance sheets that fail one of the basic solvency tests set by the Insolvency Act.
Even before Coronavirus caused the industry to shut down abruptly in March, things did not look bright. As recently as October 2019, activity levels were close to a ten-year low, new orders were down for the seventh straight month and employment levels had fallen every month since April. Appalling weather at the start of 2020 only added to the commercial misery.
The Coronavirus Crisis
The industry has staggered back to its feet with remarkable tenacity, with 70% of sites operated by major contractors and most of the big housebuilders up and moving again by the end of April. Practical issues on site operation will delay contract progress until social distancing and virus-related labour shortages are over, while supply chains will be unreliable for some time to come.
Sadly, there will be many business failures as the crisis falls like the last straw on the weakened financial backs of the enterprises in the Company Watch warning area and even some with stronger balance sheets and profitability. The Office for National Statistics confirmed that construction output fell by a record 5.9% in March alone, a month during which most sites were only closed for one week. The negative outcome for April will be off the charts. A survey by the Centre for Economics and Business Research and the law firm, Irwin Mitchell in early May suggested that the industry had been suffering more than £300m a day in lost output and that the cash reserves of subcontractors were almost exhausted.
Never the less, whatever the immediate challenges caused by the crisis, it has at least served to highlight a range of pre-existing issues, which the sector needs to address as a matter of urgency if it is to have the bright and consistently profitable future it deserves.
Labour Supply
Potential labour shortages (whatever the outcome of the Brexit trade negotiations), as well as economic and political pressure to raise productivity suggests that mass-production, automated offsite construction techniques will play an increasing part in delivering its end products.
Globalisation
Rumours that climate change activism and the virus will put an end to globalisation are likely to turn out to be wishful thinking. The construction market had become increasingly globalised, with many international firms operating in the UK. Even if there is some short-term protectionism in the wake of the pandemic, this trend will surely continue. This will create major opportunities, but it will raise competitive challenges and threats to UK businesses, in turn creating an incentive for them to innovate.
Digital and AI Technologies
Escalating technological change is going to decide to an increasing extent the core of construction activity: it will dictate what is constructed, how it is constructed and, through its ability to monitor performance constantly, how the built environment is managed and maintained. Lessons learned from closely monitoring performance will generate more change, and so on.
Climate Change
Environmental activism has not gone away because of the pandemic. Government and business may appear to be totally focused on the virus right now, but behind the frontline, work on addressing climate change issues continues unabated. Many business leaders see the crisis as an opportunity to discard the fossil fuel bias in their activities, along with much else that is outdated. Inevitably, construction will have to be decarbonised. This will mean finding different construction processes and delivering very different buildings and structures. It will also mean looking at different sources for materials.
The Ageing Population
The dramatic demographic shift that is well under way will mean a significant rise in the numbers of older people and consequently a significant rise in the retired relative to the working population. Delivering ever-rising welfare demands is a financial and logistical challenge, but it also dictates that the built environment must be transformed so that it far better meets the needs of a rapidly ageing population.
Government’s Role in the Future for Construction
It is not just the construction industry that needs to modernise for the future, the government must play its part in achieving not just any old recovery after the pandemic, but a good recovery. Just throwing money at infrastructure projects or schemes like the market-distorting Help to Buy will only perpetuate existing flaws in the sector and allow it to back pedal on tackling them on the grounds of financial expediency.
Processes such as planning and procurement must be made more efficient not through relaxation of standards but technology enablement and simplification of process. Just lowering the bar for lazy contractors and house builders would be a huge mistake when society expects the built environment to be safer and more user-friendly. This will not happen without government involvement, especially as regards planning.
The government must better regulate to encourage the decarbonising of our built environment. Building Regulations need to be modernised to control and incentivise the use of better processes and more highly skilled labour, which will restore public confidence in delivering safe buildings.
Government at both central and local levels should promote design, placemaking and technical quality, not dilute it through allowing a false dialogue about it costing more (the implication being less profits) to go unchallenged.
The Way Forward
Exiting the crisis eventually on a ‘business as usual’ basis and with a collective sigh of relief among the survivors would be a classic Luddite outcome, which will sell the entire sector’s future cheap. All stakeholders in construction need to build for the long term and ditch the philosophy, which dictates that the way to win more work in a demand-constrained market is to bid below cost and try deal with the consequences later through variations; instead they need to secure sustainable margins, while achieving competitive pricing through a new business approach that puts efficiency and integrated planning at the top of the priority list.
May 2020