A forecast of improving fortunes, but risk remains

We asked in our Winter Report whether the glass is half empty or half full … With the news that the UK escaped recession in 2022 and the Office for Budget Responsibility (OBR) now forecasting avoidance of a technical recession in 2023, 65% of our survey respondents reported improved levels of confidence in the construction industry.

Carrying on the good news, Office for National Statistics (ONS) data shows 2.4% growth for construction in February 2023. It was also the highest monthly value in level terms since records began in January 2010. Increases in the month were seen in both repair and maintenance (4.5%) and new work (1.1%), with eight of nine sectors increasing.

Most respondents to our survey saw tender opportunities remaining the same or increasing in 2Q 2023, with only 8% of non-contractor respondents thinking that tender opportunities will decrease and 35% expecting they will rise.

The spring budget saw announcements such as the creation of 12 investment zones and investment for Levelling Up Partnerships. Nearly six in ten of our survey respondents said this helps to give certainty of pipeline to the supply chain.

Eight in ten survey respondents said that the trend of materials prices settling at the end of 2022 continues in 2023. Overall, prices are stabilising but remain elevated compared to pre-pandemic levels.

Increases are generally more predictable and less volatile. Still, some fairly significant price increases are notified for products such as insulation, concrete, asphalt, aggregates and some mechanical and electrical plant and equipment. Some manufacturers hedged gas prices in autumn 2022 at higher levels and inflation impacts production costs, including staffing and materials.

Of those who completed our survey, 90% said that inflation impacts the viability of schemes. Both public and private sector projects face problems, meaning schemes are often slower to progress to site and deliverables are sometimes scaled back to make budgets work.

The labour and skills shortage is becoming apparent. So much so, the government took the unprecedented step of accepting recommendations from the Migration Advisory Committee for five construction occupations, including bricklayers and plasterers, to be added to the “shortage occupation list” by the summer, enabling them to apply for a skilled worker visa to work in the UK.

The majority of our survey respondents, 85%, felt that the move to add construction roles to the shortage occupation list would help to overcome the labour challenges the industry faced. However, only 35% believe it is sufficient to solve the problem overall.

Feedback from some who completed our survey was that the move was little more than a sticking plaster and training and development, along with a long-term strategy, are needed to create a sustainable industry.

There is still caution in the market. Nearly 80% of contractor respondents said they or their supply chain had declined a tender. Of these, 60% said this was due to proposed tender or contract conditions and risk profiles and 37% stated a lack of capacity.

Construction activity remains relatively strong and overall, it is essential to carefully consider procurement and tendering strategies to ensure suitability for the project circumstances. Risks should be mitigated as much as possible and a proactive approach taken to discussing them with the supply chain.

Both regional and sector variations characterise the market, based on project pipelines which directly influence risk acceptance and appetite.

Despite a much-improved outlook, risks remain as the construction industry, like the rest of the UK economy, will continue being prey to changes in global forces — notably the Russia-Ukraine war and the progress of the Chinese economy.

Many economies are investing in infrastructure and energy projects to support the transition to net zero carbon, improve energy security and affordability, in addition to promoting economic growth. This will add pressure to resources and commodities.

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