UK market intelligence: cutting corners now could risk projects’ future
As the UK construction industry continues to face insolvency risk from inflationary pressures, slowing demand and the climate crisis, it’s vital to keep sight of long-term goals while resolving short-term issues.
Our latest UK market intelligence report points to the continuing challenges faced by the UK construction industry – from slowing demand and raised interest rates to persistently high material and labour costs – and acknowledges the need for businesses to tackle these in the short term with a strategic approach that will also ensure long-term resilience. This includes prioritising net-zero commitments to protect project viability and future profitability.
UK Managing Director for Cost Management, Martin Sudweeks, said:
"Our industry is currently managing an incredibly complex landscape as we experience both softening demand and the continued inflation of input costs. This is driven in large part by an endemic skills shortage that is pushing up labour costs – and the sector must work with government and education bodies to tackle the capacity crunch."
In the face of immediate cost challenges, it may appear an attractive option for businesses to dedicate their efforts to firefighting the issues of ‘today’, while losing sight of commitments to policies, like net zero.
"However, organisations should instead be prioritising their long-term strategies, and understanding how profitability, project performance and sustainability can be complementary goals. By doing this, businesses will be able to achieve both short-term stability and future, strategic success."
Our tender price inflation forecast remains above target and unchanged from our summer report. Real estate forecasts are 3.7 and 2.7 percent for 2023 and 2024, respectively, and 5.5 and 4.5 percent for infrastructure.
Total construction new orders have been declining, settling below pre-pandemic levels by 10.9 percent. The deflationary pressure that might be expected from this slowing demand is being offset by higher borrowing costs, labour shortages and high material costs, which stand 42.3 percent above February 2020 levels.
Within the overall slowing of real estate demand, the sub-sector landscape is more mixed. Non-housing repairs and maintenance continues as a growth sector, which was up by 2.7 percent in the last quarter. Meanwhile, private commercial new work, private new housing and private repair and maintenance all performed poorly, down by 3.4 percent, 3.3 percent and 1.3 percent, respectively. This reflects high interest and mortgage rates and struggling household budgets.
In infrastructure, the impacts are being felt from the projects rescheduled due to prolonged inflationary pressure and a wider cooling of work pipelines, especially in rail and road sectors. However, pockets of increased investment in other sub-sectors are providing balance. The water sector is buoyant, with the upcoming start of the new asset management plan period (AMP8), and energy remains strong as the government invests in shoring up the UK’s power supply.
This autumn edition of our report acknowledges that organisations are becoming more risk-averse as they battle external economic headwinds and navigate supply-chain insolvencies. It’s tempting for those responsible for built asset programmes to focus solely on their immediate challenges. However, businesses must act now to strengthen their long-term strategic approaches.
Sustainability is a key focus, as energy efficiency and carbon reporting become increasingly important for long-term compliance, attracting investment and avoiding ‘stranded assets’ among portfolios. Programme managers must focus on enhancing project controls, take a programmatic approach, procure strategically and consider net-zero priorities and profitability hand in hand, to tackle the immediate project risks while keeping on track with longer-term goals.