Raid the piggy bank or save for a rainy day?

In previous reports, we have alluded to uncertainty being the new normal, which looks to be the case as we end 2023. Global headwinds and wider economic pressures continue to weigh on the construction industry. Nearly eight in 10 respondents to our latest survey said that the current challenges, including cost escalation and viability pressures, impact growth.

Survey respondents ranked interest rates and inflation as the biggest threat to the construction industry moving forward. Although the September Monetary Policy Committee meeting saw the end of a run of 14 consecutive increases to interest rates with a hold at 5.25%, the cost of borrowing is impacting projects and how quickly they progress through to site.

Recent government actions highlight funding pressures. The cancellation of the Birmingham to Manchester section of HS2 risks the levelling up agenda and decreases confidence in future infrastructure delivery. The pushing back of net zero dates and the changing of related policies threatens the UK’s position as a global leader on climate.

The reinforced autoclaved aerated concrete (RAAC) crisis also demonstrated budget difficulties as years of underfunding culminated in schools being out of action at the beginning of term.

The industry needs committed pipelines to facilitate investment in creating and training teams to enable delivery. Cancelling and postponing investment adds further pressure on the labour and skills shortages and undermines the industry’s ability to deliver required outcomes.

Nearly 80% of survey respondents expect the general election to occur in a year’s time and the majority (64%) predict a Labour victory. Although cost escalation slows projects and purdah will restrict pre-election activity, some departments are actively pushing ahead with projects to keep momentum and to achieve the required need.

Materials pricing continues to be steady, with eight in 10 respondents saying that market prices continued to settle in 3Q 2023. Prices remain significantly elevated compared to pre-pandemic levels and there are various factors which may lead to increased commodities pricing and raised input and production costs.

Energy pricing sees renewed pressure at the start of the UK heating season. The Israel-Hamas conflict is significantly impacting already volatile energy markets, with concerns about Brent crude oil supply disruption, particularly in the face of OPEC+ production cuts. Natural gas pricing also surged in response to the conflict due to the closure of a large gas field in Israel and concern for the safety of vessels travelling through the region.

American and European markets are suppressing metals pricing, experiencing continued deterioration in market conditions. China’s recovery has been slower than expected, leading to reduced commodities use, although signs are that decarbonisation efforts in China are boosting metals demand. More widely, the transition of major economies to net zero will draw on resources.

Unfortunately, construction insolvencies remain at an elevated level and the recent spate of high-profile firms going under shows the magnitude of the issue. Insolvencies can heavily disrupt and influence local markets for a long period after the event, not least affecting other suppliers and subcontractors the companies worked with.

These broader issues influence projects. 82% of contractors said they or their supply chain declined a tender in the past quarter. This was down from 95% in our Summer Report covering 2Q 2023, reflecting that some parts of the supply chain are starting to look to fill their pipeline, but it still represents the significant caution in the market. Feedback is that getting sufficient tenderers for complex or challenging projects can still be tricky. Projects with longer programmes sometimes see considerable risk premiums, leading some clients to consider construction management.

Despite the slowing down of the market and evidenced challenges, less than a quarter (23%) of respondents think 2024 tender opportunities will be less than in 2023. Some clients are pressing on with projects as they do not expect significant improvements in the market, while others are responding to the strength of need and therefore, investment is unavoidable. Market demands, such as tenant expectations for high-quality, sustainable buildings, also drive decisions.

All in all, it remains a challenging landscape for the construction industry, which will continue to be influenced by external factors, including the wider economy and global pressures. Collaboration, the use of digital technologies and artificial intelligence, along with the use of modern methods of construction, where appropriate, will help the industry respond to challenges and emerge stronger.

Hold on to your hat!