The clouds that hang over the sector

Paul Hamer has been chief executive of Sir Robert McAlpine since 2017. He was previously CEO of consulting engineer White Young Green (WYG).

This summer’s unseasonably heavy rain has reportedly had an adverse effect on the construction sector. When the Office for National Statistics published its construction output figures covering July 2023, the 0.5% drop was attributed by some analysts to the downpours disrupting projects.

Whether or not the inclement weather did have such repercussions, it is clear that economic clouds still hang overhead. For one, the tail of Covid-19 disruption, which had a profound impact across the industry, is still showing itself on balance sheets and in many of the full year accounts published in 2023.

Additionally, the many fixed price contracts agreed in 2019 and early 2020 pre-date Covid-19, some of the Brexit-induced disruption and the materials shortage stemming from the conflict in Ukraine and the onset of hyper-inflation which have changed so dramatically the cost landscape. As a result, those projects are much more expensive to complete than originally envisaged, with the mounting insolvencies in the construction sector being the inevitable result of these extraordinary economic pressures.

It is not just construction firms that have felt the bite of economic reality, but the Government, too. Just as many contracts were priced three years ago, so were a number of Government spending commitments, not least Project Speed – the ambitious scheme to boost the economy through spending on infrastructure – which has been nibbled away by inflation. Though Project Speed was an unquestionably laudable plan, and did initially make some headway, the economic climate has squeezed Treasury coffers, raising questions about the affordability of some projects, whilst others have inevitably been subsumed by the electoral cycle.

Blue sky ahead

Reassuringly, bluer skies do appear to be on the horizon. The sector is close to working its way through many of the legacy contracts, whilst the last of the financial disruption wrought by Covid-19 will hopefully have dissipated by next year.

But this, however, does not mean that the sector has now overcome its challenges. Concerns about an impending labour shortage have once again bubbled to the fore whilst the sheer number of insolvencies suggests the supply chain remains fragile. Such a climate will require clients, contractors and the supply chain to work together, ensuring payments are made on time and, where feasible, mobilising advanced payments to keep money flowing through the wider construction ecosystem to ensure that firms remain solvent, and materials can be purchased.

Indeed, collaboration across the entire project lifecycle cuts to the heart of the issue. Problems still hang over the sector, but these can be addressed through greater trust, transparency and collaboration – the lack of which is perhaps the perennial problem. Economic headwinds come and go, but a reluctance to collaborate all too often lingers.

Specialisation and collaboration

Fortunately, change is stirring; and bundled up in the challenges of the next few years lies significant opportunity. For one, the cost pressures that many contractors have faced for the last three years have prompted many of the larger firms to reorganise or restructure their operations to concentrate on their strongest sectors. In the immediate term at least, this will allow contractors to build back quality order books.

The benefit of such an approach is that specialising not only allows firms to boost long-term productivity by becoming masters of their domains, but it also fosters deeper client relationships, allowing for greater collaboration and greater contractor involvement in the early stages of a project. This effectively rebalances the equation between cost and value, ending the race to the bottom on price that leaves almost all parties unhappy.

The last point is instructive. Early contractor involvement sketches the art of the possible. It allows designs to be shaped at the outset to improve efficiency or reduce carbon emissions and, in time, could even move the sector to the position where retentions can be removed from contracts to further support supply-chain liquidity.

The sector has already taken some solid steps in the direction of greater collaboration, and it is infrastructure that is leading the way. A number of infrastructure clients, for instance, are implementing the Project 13 Principles, a new delivery model intended to encourage all parties involved to become a unified high-performing enterprise. This allows for the creation of integrated project teams, enhanced collaboration and, with it, the chance to unleash real opportunity and value.

Of course, collaboration cannot solve all of the sector’s problems. The labour shortage, for instance, is perhaps best addressed by developing future leaders today; taking on more apprentices; and by broadening the appeal of the sector to attract talent from right across the workforce. On a more fundamental level, the Government needs to commit funding to a clear, long-term infrastructure plan to support the sector in both the short and long term.

But when it comes to immediate problems, collaboration is the order of the day. Just like the rain, the economic challenge shall pass – but it is, perhaps, up to the sector to determine how quickly.

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