UK market intelligence: Building more with less
With a steady worsening of skills and labour shortages, our UK market intelligence (UKMI) report for spring Q1 2023 explores where and how productivity is being improved across the UK construction industry, which technologies and techniques boost efficiency most effectively and help attract new talent, and how the progress can be extended and accelerated.
Construction – like the UK economy – is showing signs of strain. However, the sector had a reasonably strong performance in 2022 and this came despite a steady worsening of a ‘people problem’ that has long dogged the industry.
With the total number of people working in construction falling by 10.5 percent since 2019 Q1, labour shortages have become entrenched. Schemes to attract more migrant labour for specific construction roles have been unveiled by the government and will be helpful, but not a panacea.
But there are signs the industry is learning to achieve more with less labour. Construction sector productivity – widely regarded as key to lasting growth – is finally increasing after decades of decline.
With some client demand cooling and interest rate rises working through the economy, capital programme budgets are being squeezed – so it’s vital that the industry consolidates its productivity gains and empowers its people to deliver greater value.
Economic Overview: Recession dispelled, or delayed?
The UK narrowly avoided recession in 2022 Q4 and signals for 2023 are mixed. Preliminary data from the Office of National Statistics (ONS) showed that Gross Domestic Product (GDP) flatlined in 2022 Q4 against a 0.2 percent contraction in 2022 Q3. In January 2023 GDP rose by 0.3 percent on the month, led by services, but it is too early to tell if that momentum can carry on.
Since 2022 Q3 the market has broadly become more optimistic about where overnight lending rates will end up, helped by policy coordination between the BoE and Treasury. Interest rate rises are nearing a peak, with loosening expected in 2024. Financial instability has given the BoE extra motive to limit the tightening cycle, both to support bank liquidity and because credit rationing by lenders will lower inflation anyway. Yet the BoE walks a monetary policy tightrope. If too much demand is untethered by lowering interest rates, inflation could quickly reappear amid labour market tightness.
For now, UK unemployment in 2022 Q4 at 3.7 percent was unchanged on the quarter prior and remains close to 1970s lows. A lack of skills availability is affecting many advanced economies, but Brexit and an exodus of workers taking early retirement since COVID-19 are idiosyncratic factors worsening the situation in the UK. However, government schemes to get people back into the workforce included in the March budget stand to make a medium-to-long-run difference and act as a partial solution for labour shortages.
Workers have a powerful bargaining position which is reflected both in wage growth exceeding productivity and mass industrial action across the public sector, prompted by price growth itself. Mass strikes contributed to the December decline in GDP and walkouts continue to present a threat to output in the year ahead.
Tender price inflation forecast
Demand is a central determinant of industry pricing, and the current economic backdrop supports our view of disinflation – a much slower rate of price growth.
As demand softens, and some input costs alleviate, tender price growth is starting to converge with construction costs. However, cost reduction and competitive tendering are not a mainstay in the market yet. Margin retention – following a fallow COVID-19 period - and concerns about future cash flow may see contractors withholding savings.
The backdrop of falling commodity prices will undoubtedly ease pressure on industry pricing, coupled with softening demand. However, there are two important factors at play that are expected to keep tender prices in positive territory - ongoing labour shortages and contractors going bust.
More productive today, more people tomorrow
Construction’s expansion in 2022 was notable not just for the way it bucked the slowdown in the wider economy. It was achieved even as the number of people working in construction, and the number of hours they worked, decreased.
Construction is suffering a long-term loss of skilled workers as the number of those retiring, or leaving the industry, consistently exceeds new joiners. No matter how productively it works, a dwindling labour force will eventually cancel out efficiency gains without using technology to find new ways of working.
Existing efforts to tackle the recruitment crisis are struggling, and the number of 16 to 24-year-olds enrolling on construction trainee schemes is now barely a quarter of its 2007 level.
Yet new technologies and ways of working, such as Modern methods of Construction, new digital tools and AI software; together have boosted productivity and may also hold the key to solving construction’s image problem among school leavers.
Repositioning construction work as a chance to shape the infrastructure on which modern life runs, while learning highly-prized digital, engineering and robotics skills is now possible. That’s why the industry must leverage and consolidate the advances that have delivered better productivity today to attract the workers of tomorrow.
Read the full report to see more economic data and insight, and to find out more about tender conditions in the UK.