One common thread around the world is that governments are investing heavily in projects to promote easier movement of people and reduce congestion. Road and rail sit at the top of the list for growth sectors globally.
This upswing in investment comes after years of urging from major international organisations. As a recent World Bank note stated: “Infrastructure development lies at the nexus of economic growth, productive investment, job creation, and poverty reduction.” (5)
When it comes to transport, developing nations need to greatly expand their infrastructure to accommodate economic growth and spread wealth and wellbeing, while developed nations need to revitalise theirs to sustain prosperity.
High-tech and manufacturing are also in the top five growth sectors. Interestingly, the scores indicate that while growth here is widespread across the regions, the increase is more marginal than strong.
Urban development and commercial development, which cover the construction of apartments and commercial offices and hotels, take the remaining top five spots for growth, reflecting the intensity of urbanisation and rising global economic growth.
Beyond the five, it is interesting to note, the mining and oil and gas sectors remain relatively in the doldrums, but as the sectors rebound there are signs of expansion in 2018.
Looking at the challenges that local contractors face in profitably delivering projects on time and on budget, skills shortages remain firmly at the top of the list.
The spread of greater opportunity, higher education and loftier aspirations is making recruitment into construction harder. Meanwhile an increasing proportion of the workforce is retiring or nearing retirement. There isn’t a simple answer, but investing in more technology, technical skills and training and more advanced construction techniques are essential.
Directly linked to the skills shortage are two further key challenges, rising costs and stagnating productivity. This emphasises the imperative to attract and retain top talent. Those firms that do invest in technology and talent are likely to be the strongest survivors when growth in the global economy softens again, as inevitably it will. Our subject matter experts have provided first hand on-the-ground insight into why these challenges exist and what can be done to mitigate them.
|67% of all respondents said skilled labour shortages had a major or large impact on the delivery of construction projects||33% of all respondents said a lack of confidence in the market had a medium impact on the delivery of construction projects||63% of all respondents said labour disputes and industrial action only had a fair or little impact on the delivery of construction projects|
|Major/large impact||Medium impact||Fair/little impact|
|1. Skilled labour shortages||5. High insurances, taxes, duties, government charges and other ancillary costs||9. Difficult contractual and legal conditions|
|2. Government red tape, bureaucracy, delayed approvals||6. Lack of confidence in the market to invest in new projects||10. The market is oversupplied, e.g. too many vacancy apartments and office space|
|3. Rising costs of construction||7. Too many contractors chasing too few projects||11. Contractors are having difficulty finding sufficient credit|
|4. Low workplace productivity, inefficient and outdated work practices||8. Political instability||12. Labour disputes and industrial action|
1.3tn Construction spending hit an all-time high in cash terms of almost USD1.3tn in 2017
2m More than two million construction jobs were shed in the economic downturn ten years ago.
Construction spending hit an all-time high in cash terms of almost USD1.3tn in 2017 and forecasts suggests that figure will be eclipsed in 2018. Increasing activity, driven by major cities and urban markets, presents ample opportunity. But new and age-old challenges still plague the industry.
Balancing the supply and demand of labour and materials remains the single biggest challenge. More than two million construction jobs were shed in the economic downturn ten years ago. The labour pool is still well below
pre-2007 levels and worryingly, it is an older workforce. It is getting harder to recruit youth into construction. There have been some encouraging signs though, following more intensive efforts to attract new workers. However, labour shortages will drive higher costs and lengthen completion schedules.
The impact of skills shortages is not helped by the industry’s poor record on productivity. Despite improvements, such as lean construction and better use of technology, productivity remains a hot topic for construction.
Meanwhile, materials cost rises continue to outpace general inflation and this trend may be exacerbated by tariffs, particularly on imported steel and aluminium products, as policy is shaped to encourage buying US rather than imported goods and materials.
Managing Director, USA and North America Head of Real Estate
Despite economic recovery and more controlled inflation, international investors remain wary of Argentina’s professional, regulatory and legal standards. There are two crucial areas that concern investors in construction, a lack of a best-practice mindset and incomplete documentation.
The government is leading bold infrastructure projects and private investors and contractors are feeling more confident about undertaking new and more ambitious projects. But nagging doubts remain. Are projects planned accurately with their real implications understood from the start? Are projects correctly budgeted and controlled considering the entire lifecycle of the asset?
International investors are increasingly looking to minimise risk by implementing industry best practices and avoiding local ways of doing business-as-usual. However, these best practices don’t tend to be the norm within local organisations, which means bringing in additional resources. Local contractors are used to receiving documentation that is incomplete and often misleading. This becomes an excuse for not delivering projects on time or on budget, leading to numerous legal claims.
It will take time for internationally proven standards and best practice to become the norm. When this happens, it will lead to construction having a more sustainable and positive impact within Argentina’s economy.
Looking across the UK market there has been clear market softening in the year following the EU referendum. In this environment customers of construction need to be agile and alert to the changes in the contractor’s ability to take and successfully manage risk, particularly in a cycle of skills shortages and rising input prices are eroding margins.
The supply chain is the lifeblood of a construction project and it is important to recognise that across the UK there are clear regional variations in capacity.
This demands an intelligent market response from construction procurers as they consider the ability of the supply chain to deliver and the changing appetite for risks.
If Carillion's failure has brought one thing into sharp focus it is that commercial risk transfer can be illusory in a fast-changing market.
Although Brexit has generated uncertainty, reducing UK construction output, there are signs that increasing devolution may be acting as a counterweight. Beyond London, devolution has created hot spots in spending on infrastructure and housing in key UK regional cities. This in turn may well fuel further investment.
Skills shortages are proving a major problem for the French construction industry. A study by the Institut national de la statistique et des études économiques in October 2017 found 70 percent of construction firms are struggling to recruit skilled labour, despite France’s unemployment rate being above the EU average. (6)
The problem is not new to France, suggesting it may be a cultural issue.
The skills gap was extreme in the early 2000s, easing during the 2008 global recession, before re-emerging in 2016. Since then skilled labour has again become scarce, creating intense competition over recruitment. This trend is expected to continue, reinforced by large projects such as the Grand Paris and the 2024 Olympics.
Construction companies and the authorities have instigated specialised programmes to better prepare students for careers in construction and there is ongoing reform of apprenticeships and vocational training. That’s a major opportunity for both the construction market and authorities to have a positive impact on employment in the future.
Economists and construction experts point to the industry’s lack of attractiveness. Despite efforts to improve the image and to create partnerships with universities and engineering schools, students and young professionals are often reluctant to choose a career in construction. It could be a symptom of the French cultural and systemic bias favouring general broad-spectrum education, discouraging students to pursue more specialised, technical and hands-on training.
Kenya’s 2030 vision includes building a million affordable homes to house the flow of rural people into cities.
After political turbulence in 2017, with two elections in six months, the prospects for Kenyan construction looks much brighter for 2018 and beyond.
There is major infrastructure spending on the Standard Gauge Railway
between Nairobi and Naivasha and the planned new Nairobi to Mombasa Road. International real estate investors are re-emerging, and local development firms are pushing forward with plans. The oil sector, finally, seems set to blossom with exports slated for 2019.
Meanwhile, Kenya’s 2030 vision includes building a million affordable homes to house the flow of rural people into cities. And an emerging middle class is demanding better-quality homes.
These future workflows present Kenyan construction with challenges in three main areas – skills shortages, contractors struggling to find credit and low workplace productivity.
To address the skills issue, the industry must build better relationships with technical training colleges and universities to ensure learning aligns with the sector’s emerging needs.
Albeit a macro-economic issue, the cap on interest rates since 2016 has led to a tortuous process for contractors to navigate. Encouragingly, there are discussions about how to release the shackles on credit.
Raising productivity is a problem. Clients and contractors automatically go for low-paid, low-skilled workers. This inhibits innovation. A better-paid workforce would increase spending back into the economy providing a virtuous circle.
Managing Director Cost Management
A key challenge for UAE lies in how risk is allocated within contracts, which are
regarded as far more onerous in this region than elsewhere. Historically, the norm has been for clients to tailor contracts by transferring all the risk to the consultant or contractor.
There still exists amongst some clients a culture not to negotiate contract terms, adopting a “take it or leave it” strategy. This can lead consultants and contractors into agreeing terms they would not accept elsewhere.
In turn this can result in higher tender sums, where associated risks are priced into bids, and a potentially smaller pool of tenderers, with some consultants and contractors stepping away having judged the risks unacceptable. Ultimately, it lowers the likelihood of attaining a best-value appointment.
Outdated contract forms are commonplace, with clients sticking to what they know. But as industry practices adapt, these outdated, standard contracts are amended, favouring the client, and become in effect bespoke contracts. This can present serious risks to contractors who may not fully appreciate the amendments and unwittingly administer the contract as they have in the past, leading to claims.
An average dispute in the UAE is twice as large as elsewhere and the average time taken to resolve disputes has risen to 15 months.
One solution lies in awareness building of alternative procurement for both clients and contractors. Certainly, those operating in the region must diligently read and understand the terms, so they can administer contracts accordingly.
Construction in India is hindered by an acute labour shortage, especially the skill set in the fast growing housing and infrastructure sectors.
It is getting harder to recruit. Construction graduates are opting for more lucrative jobs in IT, particularly abroad, and the emergence of greater opportunities in other occupations has created a shift in aspirations among India’s school leavers and graduates.
Construction’s appeal is worsened by the temporary and transient nature of much of the employment.
The effects can be seen in rising costs to both project owners and contractors, fewer apprenticeship programmes, a less-qualified workforce creating safety concerns and less focus on trades and vocational schools.
This poses a challenge for the industry to demonstrate its value as a career. It will need to increase pay to attract and retain workers, reaching out to a younger generation and invest more in training and mentoring programmes.
Construction is also hindered by red tape, bureaucracy and delays in approving projects. The multi-tiered administration inhibits progress, while litigation related to land acquisition adds further delay and increases the financial risks taken by developers.
However, there are signs of change, such as the ‘Swiss Challenge method’ whereby a submitted proposal is viewable online making it open to scrutiny, discouraging impractical projects. And there is the RERA Act which should ease approvals and support fast-track real estate projects.
Sky-high housing prices are a way of life in Hong Kong. Experts believe the low
affordability is due to the limited land supply, falling household size and population growth.
In late 2017, the government announced its policy to offer more public housing
which will lead to more public funded jobs. However, the labour market is already short of skilled labour and the situation is in danger of worsening.
In 2018 and over the next few years, Hong Kong’s construction costs are expected to rise, despite already being historically high. One main driver pushing up construction costs is this shortage of skilled labour.
The public and private sectors are competing for the same resources from the same labour market. It is expected that with this shortage of skilled labour, wage cost will continue to increase and in turn further raise the cost of construction.
The challenge for the construction labour market is not just about the lack of numbers employed. The workforce is old, ageing and inflexible. According to the Hong Kong Construction Association, about 42 percent of the Hong Kong construction workforce is 50 or older.
To mitigate the challenge, Hong Kong must learn from other market’s experience. In the short term, employing imported labour might be the answer. However, a long-term strategy is needed to encourage youth into the industry.
In recent years volatility in global markets, particularly natural resources,
has unsettled the ability of clients to set strategies, develop long-term programmes of investment and execute their projects.
The long-term nature of construction investment means that the industry thrives on confidence. Without it, leadership can become paralysed by unforeseen risk and shy away from setting long-term targets and freeing up the necessary capital.
This inhibits the delivery team’s potential to properly engage the supply chain with a guarantee of solid volumes of work. It can lead to short-term variations to longer-term strategic plans, increasing bureaucracy and uncertainty delays. In this environment, local supply chains become nervous about recruitment and skills development, and supply-chain partnerships set-up on the promise of long-term work are undermined.
The problems may only become apparent later, when the investment decision is finally made, and the supply chain is underprepared to respond effectively.
It is encouraging that clients who have confidence, clients that have developed a confidence in their abilities to drive their projects through and have engaged constructively with supply partners are seeing their supply chains respond with enthusiasm and commitment – sharing their business goals.
This approach should be the goal of any organisation with ambition to grow and develop their business.
This content is part of the International construction market survey 2018