Facing the headwinds

Uncertainty has returned since publishing our Winter 2021/22 market report.

Whilst the industry continued to face materials, labour and site productivity issues at the beginning of 2022, there was an air of confidence demonstrated by the response to past challenges and mitigation of the impacts experienced. The COVID-19 pandemic also shifted thinking within the industry, having bought greater collaboration and the embracing of innovative approaches.

Russia’s devastating invasion of Ukraine has resulted in a huge humanitarian crisis and has renewed and added further pressure to the concerns the construction industry was facing.

There are also broader societal impacts, with commodities costs soaring, impacting the cost of living. The Bank of England has warned that it expects inflation to peak “slightly over 10 percent” in the last quarter of 2022, following an expected further substantial increase in the energy price cap in October. It says that 2023 will feel like a recession, with interest rates rising as high as 2.5 percent in the middle of next year.

Of the respondents to our survey, 87 percent of contractors said that they had seen increased prices due to the conflict, along with other issues such as the reduced availability of specified materials, supply chain disruption and reduced validity periods.

The Department for Business, Energy and Industrial Strategy’s (BEIS) ‘All Work’ Construction Material Price Index increased by five percent in the month to March, with fabricated structural steel rising by 19.2 percent in the month.

This cost escalation is adding severe pressure to project budgets and 67 percent of survey respondents said that the current challenges are impacting growth of the construction industry, with some schemes stalling due to the uncertainty.

Although projects are taking longer to start on site, there is general confidence in pipelines. New work was reduced over the pandemic, except for infrastructure. Office for National Statistics (ONS) data shows that infrastructure output increased by 25.6 percent between February 2020 (pre-pandemic) and February 2022. Large infrastructure programmes are continuing and the government has made pledges to invest in levelling up. A new energy strategy was also recently launched to foster energy independence and tackle rising prices.

Activity is also returning to other sectors hit by the pandemic. So much so, that our survey respondents ranked residential, education and commercial as the top three sectors for current tender opportunities. Anecdotal feedback was that many clients are keen to press ahead with projects having mulled them over during the pandemic, as well as needing to respond to changes brought about by the pandemic and to futureproof assets.

Lessons learnt from the pandemic regarding early supply chain engagement and robust tender information remain essential, along with fair risk allocation. Due to volatility in the market, contractors are being more selective over projects and clients. In our survey, 78 percent of contractor respondents and 63 percent of non-contractors said they had declined to tender a project or had a contractor pull out of a tender due to the selected procurement route or tendering strategy on a project.

Besides the Russia-Ukraine war, there are other headwinds for the construction industry. Rising COVID-19 cases and lockdowns reducing activity in China are a concern.

The long-term challenges with construction skills and labour shortages are starting to bite; 70 percent of contractors reported issues with labour supply in the first quarter and 84 percent saw increased labour rates.

Harrowing reports have been released concerning the climate crisis. A new report from the World Meteorological Organisation indicates that the climate crisis is intensifying. The forecast shows that the probability of one of the next five years surpassing the 1.5C limit is now 50 percent when as recently as 2015, there was no chance.

Whilst there is now a greater understanding of the importance and urgency of reducing carbon emissions, there is a gap emerging of how to achieve targets. Only 54 percent of respondents said that there is a clear strategy and action plan to ensure objectives are met on their projects. Respondents also noted that due to market conditions, many clients are looking to minimise costs and are prioritising essential items such as those required to achieve a sustainability standard or Building Regulations compliance.

Data from the ONS shows that whilst productivity improved across the whole economy, in the construction industry (including the construction of buildings and civil engineering), productivity has remained relatively stagnant over the past 20 years.

Many gaps are emerging for the construction industry — from the viability of projects to achieving sustainability aspirations and also with regards to skills, labour and productivity. Investment and the adoption of new technologies are critical, as well as ensuring the best use of resource.

The future of the industry depends upon building on the foundations laid during the pandemic: the implementation of digital tools and data analytics, the overhaul of the just in time mindset, increased use of modern methods of construction (MMC), more flexible working and a growing focus on the climate emergency.

Against a challenging backdrop, there is genuine hope that the industry can emerge stronger from the challenges.