Building & Construction
Sector trends & challenges
Delays and profitability
The inherently low margins, project delays and cancellations and increased costs are adding fuel to the fire. Contractors are currently looking to run some contracts for cash, to weather the storm until the market stabilises.
Pandemic driven societal shift
COVID-19 has driven a shift towards home working and rural living which continues to benefit house builders; however challenges for operators specialising in city centre and commercial developments are likely to remain into 2022.
Shortage of skilled labour
The challenges of working in the UK, increased wages in other sectors and an underinvestment in upskilling construction workers, is driving the skills shortage currently seen across the sector.
Sector rating profile
Building & Construction
The UK construction sector is a significant part of the UK economy, representing around £150 billion output in 2020. The annual rate of construction output price growth was 3.4% in June 2021; this was the strongest annual rate of growth since August 2019, which highlights the strong recovery in output following the pandemic. However, construction output fell by 1.6% in volume terms in July 2021, with the level of output now below its pre-coronavirus (COVID-19) pandemic February 2020 levels. The sector is made up of thousands of businesses, with main contractors often supported on each project by multiple sub-contractors, many skilled trade persons, architects, quantity surveyors and material suppliers. This makes the sector one of the most interlinked in the UK economy, supporting over 1.25 million jobs in the UK, across the three main sub-sectors: Commercial, Residential and Infrastructure.
The sector as a whole has enjoyed a prolonged period of positive growth since 2013, although there was significant variability in performance across the sub-sectors. Traditional issues in the sector are low margins and skill shortages. In 2020 and 2021 these have been worsened with the uncertainty caused by the COVID-19 pandemic, Brexit, supply issues, raw material price increases and changes in the way we live and work. The sector has been relatively robust during the pandemic, but these challenges are starting to have a real impact on profit and cash, and this is set to continue into 2022.
All of this means the UK construction sector will continue to evolve, with new opportunities and challenges expected both now and in the future. Encouragingly, industry experts expect construction output will continue to rise by approximately 9.7% in 2022 (ONS, Construction Products Association); however challenges from Covid-19 and Brexit must be overcome to ensure this growth is deliverable and profitable.
The economic impact as we come out of the COVID-19 pandemic and Brexit are still yet to fully work through in 2021 and there remains the prospect of subdued economic growth and investment in the immediate to medium term.
Construction sites were forced to reduce onsite activity due to COVID-19 with some operating at 80% workforce due to social distancing requirements. These operational restrictions have led to project delays and cost overruns, increasing the pressure on already tight margins. The construction sector is already impacted by tight liquidity, but the pausing and delay of projects has added fuel to the fire. In some instances, contractors are even having to financially support subcontractors to ensure contracts are completed, even if this is at a loss, to contribute towards overheads, generate cash and avoid contractual damages claims.
A key component in the overall outlook for the sector is the UK government’s commitment to infrastructure, with projects such as HS2 ensuring the pipeline of Infrastructure looks strong in the medium term. In the 2021 UK budget further measures were announced including the launch of a £12 billion infrastructure bank and a £1 billion regeneration fund; however, commentators note this will only replace some of the funding lost from the EU. The budget also stopped short of announcing further significant infrastructure spending to offset the expected reduction in development projects within parts of the private sector.
The economic downturn and societal shifts have, at least in the short-term, reduced demand for new urban residential and commercial units, therefore even with government support, operators specialising in city centre office locations are finding greater challenges than suburban or rural low-rise housebuilding. Certain pre COVID-19 city centre projects have been mothballed, cancelled, or repurposed and future mid-tier consolidation is likely as firms seek critical mass. If this is not achieved there is a potential risk of failure. High overhead cost bases and low margins, with a managerial focus on driving top line sales rather than a focus on profitability and cash performance, makes the sector particularly at risk to downturns. However, revenue recognition can make it challenging to understand the true contract business performance of individual companies.
Shortage of skilled labour is another pressing issue within the industry, driven by the relocation of EU nationals. The construction industry relied on EU workers for skilled and non-skilled roles. If immigration continues to be limited due to a reduction in free movement, the skills shortage will worsen. According to the Construction Products Association there were 127,000 EU-born workers in the industry in Q3 2020, which is 28% down from 176,000 in Q3 2019. While the exact figures for 2021 are yet to be published, the ONS estimates that EU construction labour has fallen by 42% in the four years to June 2021.
The current HGV driver and worker shortages across a number of sectors in the UK are starting to have a significant impact on construction sector productivity and is resulting in wage inflation. Alongside this there is increasing disruption due to the availability of equipment and spare parts, making it challenging to source and obtain some equipment.
Despite all these challenges one area which continues to grow and is attractive, both in terms of profitability and availability of financing, is housebuilding which has seen strong demand for more space, and rural locations. The sector has also benefited from the recent stamp duty holiday. This strong demand is set to continue, at least the short term, as workers adapt to hybrid working.
Find Your Expert
Steve Absolom is Interpath Sector Leader for what we call the 'Property' sector. This includes Building & Construction as one of three core segments. Neil Morley leads our approach to the Building & Construction sector nationally. For a full list of our senior people with experience in this sector use the button below.Our senior team