The construction industry faces a perfect storm of challenges, from the cost-of-living squeeze to supply chain disruptions. The sector must learn the right lessons from recent years to seize the opportunities of the future.
In many ways, the past couple of years have been record-breaking for construction. Annual construction output increased by a record 12.7% in 2021, compared to the year before. This was the largest increase since records began, though it followed the pandemic-stricken 2020, which saw the largest decline in annual growth at 14.9%. On top of that, prices charged on work in the construction industry increased 7.3% in the 12 months to March 2022 – the strongest annual rate of output price growth since records began in 2014.
But these figures don’t tell the whole story. The recent dramatic rise in inflation, rising energy prices, materials shortages and uncertainty stemming from the war in Ukraine have driven extreme price fluctuations. The latest data from the BEIS materials tracker suggests that year-on-year prices for all building work rose by 24.5% from March 2021 to March 2022. Roof tiles rose 24% in a year, steel was up 25% and concrete reinforcing bars jumped an astounding 63.6%.
Add in question marks over labour availability, a cost-of-living squeeze and ongoing supply chain disruptions that many attribute to Brexit and you have a perfect storm for the building industry, one that seems incredibly difficult to navigate.
No quick fix to construction challenges
Many sectors emerged from the rocky months of the pandemic with renewed focus and a new perspective on their operations. Digital transformation is said to have accelerated, plunging sectors such as retail and banking into brave new worlds of customer-centricity and efficiency.
The construction sector was a stalwart of the economy during the pandemic, enduring while many others could not. Could the industry also experience a new dawn, learning the lessons from these darker days to emerge stronger, leaner and better in the future?
There is no quick fix. Recent events have tested the sector to its limits, revealing some fundamental shortcomings; more digital efficiency looks like it’s nowhere near enough to turn things around.
Iestyn Jones is director at C2J Architects & Planners, which has a range of focuses, from domestic extensions to large-scale projects across residential, retail, leisure, healthcare and education. “We’re facing two major issues,” he suggests. “The first is the bottleneck in the planning system and the second is the cost of materials and uncertainty in the market.”
Every day is like swimming through treacle. There’s a Covid hangover.
For many industries, the increased attention on work from home and the move to hybrid working has been a boon, leading to better productivity and an improved employee experience. These are both essential during ‘The Great Resignation’.
But the transition isn’t so smooth or even feasible in construction. Construction company Jehu Group is a third-generation family business in the commercial and housing sector. CEO Simon Jehu agrees that conditions are tough. “Every day is like swimming through treacle. There’s a Covid hangover. The legal system, the banking industry, local authorities or utilities: no-one is back to normal.”
Even on sites, there’s a marked difference in attitudes towards a work/life balance, he says. “If we’re honest with ourselves, we’re on a three-day week,” he says, noting that this seems to be more apparent in Wales, where Jehu is based.
It seems as if the planning sector has yet to work out what hybrid working means, Jehu reckons. “When there are problems that need resolving it’s a lot easier to do face to face with a big, red marker pen. It’s a brainstorming exercise – we work in a creative industry.”
Despite today’s widespread use of Teams or Zoom, videoconferencing still isn’t an adequate replacement for getting everyone in the room and hashing out a problem. “Council [planning departments] are reluctant to bring people back into the office. That’s where the breakdown is happening.”
Still, with so much talk around digital transformation, you’d think that two years of pandemic-accelerated innovation would have provided some kind of solution. Martyn Wallace is chief digital officer for the Digital Office for Scottish Local Government, whose latest digital planning strategy focuses on better data and intelligence for decision-making, he says.
“The trouble in councils is due to cuts where we have had to let go of a lot of admin folk, including people who used to be able to answer all the enquiries for planning applications. In some councils, the actual planners have to deal with information requests, including Freedom of Information (FOI) requests, which means the whole process is slowed down.”
Price hikes hit construction
Delays bring more than just frustration. With prices currently so volatile, it’s becoming almost impossible to manage client expectations. The fixed price contracts that could absorb moderate price fluctuations and the low inflation of the past couple of decades is suddenly no longer fit for purpose.
“We are used to sub 2.5% [inflation] and have got into the position of using fixed price contracts,” says Jehu. “There have been fluctuations [in inflation], but that fixed price cost was still manageable. Now you can’t get [long-term] prices for key materials. The quote would only be valid for today.”
James Nevin is partner at Blue Engineering, a London-based structural engineering firm. Despite the challenges, he sees cause for optimism “It’s very busy, meaning we can command good fees and make good money. But where do we go from here?”
Nevin sees first-hand from clients the nervousness of balancing cost and client expectations. “Builders are scared about going up another percentage because modern contracts just don’t have that much wiggle room. Everyone is worried about getting ripped off and they want a simple contract.” He points out that the builder now feels the need to price with a much larger margin. If they win the job but prices go up, they haven’t just lost profit, it’s eating into wages.
It’s very busy, meaning we can command good fees and make good money. But where do we go from here?
Although smaller contractors are potentially nimbler, they’re experiencing the same difficulties. Simon Plummer, owner of Reading-based Ruscombe Design & Build, says the average client had their job priced up nearly a year ago. But within six months, such a job had seen a 20-30% price rise. “How do you go back to the client and say that? In jobs that you’ve taken, you have to take the fallout.”
An inflated market means it’s even more difficult to get boots on the ground, with contractors expecting to be flooded with work in the near term. “When [customers are] asking when builders can start, we’re giving lead times of at least 15 months. How can we possibly say how much it’s going to be at tender when that’s traditionally a three-month lead in?” asks Anne Owen, whose eponymous architecture practice focuses mostly on domestic projects in the Berkshire region.
In practice, this means companies like Plummer’s are advising clients to move from the typical 10% project contingency in case of overspend to at least 20%. Shifting tack mid-job because certain materials have become prohibitively expensive is not possible for smaller contractors, “if something has already been approved, it’s not easy to go in and change it.”
Owen agrees that clients must be much more pragmatic about their contingency planning. On more than one occasion clients have been shocked to discover their original plans have come in “probably a third more than [they] wanted to pay”. This necessitates a return to drawings, a return to planning and another trip through the system.
The scarcity of certain materials isn’t helping to take the heat out of the market. Bricks that would normally turn up in four to five days are taking up to 26 weeks to arrive, says Jehu. He’s even taken to rationing materials on site. Smaller contractors say managing product availability and price can often come down to personal relationships at builders’ yards, with the cost of materials varying even from one outlet to another, depending on how well the trader is known to the manager.
Managing demand in the construction industry
There’s a sense that the industry is working flat out to keep up, despite all the challenges. Construction appears so in demand that it could, in theory, take its pick of projects. And yet, it’s not showing up in profit. “We’re still turning over 50% of what we were during lockdown but it’s not through a lack of work. Even though we kept going during the pandemic, very few contractors were profitable but kept going. Now a lot of balance sheets need to recover. We have the biggest pipeline we’ve ever had, we just can’t deliver on stuff,” Jehu reveals.
The architecture business also seems to be motoring. “Probably the biggest challenge we face is availability of builders, particularly here in the southeast,” Owen warns. “The way people live in their space has had a dramatic shift from pre-pandemic so the demand for this kind of work has gone through the roof.”
But this could be a false dawn, according to Niven, who says unexpectedly high prices are causing potential clients to cast their nets wider in search of an acceptable quote. That means more builders are quoting for more work, yet the actual volume of projects hasn’t changed much. “The conversations I’ve been having with my architects is that we have to remind builders that they might be pricing on 10 projects but that doesn’t mean that’s the number of projects out there.”
In fact, Niven calls for a more widely available database that lists the projects going through planning; this could be shared with builders and business owners so they can better understand the true size of the market. “That might help them reduce their prices and feel more confident.”
Plummer says that good old-fashioned word of mouth has given his firm a realistic view of his market. “We’re fortunate because we don’t advertise so the people who approach us are genuinely looking to get started.
There may have to be a fundamental rethink of how the sector is organised. C2J’s Jones points to a need to bring the supply chain much closer together. “We should probably be more self-sufficient, something the pandemic showed everyone when it came to shopping locally. Construction has started to push towards using more local suppliers and building up relationships so that everything is on a smaller footprint.” This would also help address growing demands around sustainability, he adds.
With prohibitive steel pricing perhaps giving the industry a nudge in the right direction, Niven agrees, revealing that the company is reporting how much steel is used on each project at the front of its client documents and offering the option to offset its carbon. “What [that] means is clients are asking how they can move to timber which is more sustainable and cheaper.”
“If we learn anything from all of this, it’s that we should be more independently sustainable,” Jones adds. “Surely it’s got to be more sustainable to get it from 10 miles away than from China?”
Efficiency is also a key point. While rationing bricks is an extreme approach to reducing waste, Jehu cautiously welcomes the ability to take stock – sometimes literally – and find ways of being a leaner operation overall. “It is encouraging better planning. From an overheads level, we’re getting by with far less.”
Construction’s technological opportunities
Technology is expediting the process to a degree, as all parties involved in projects begin to use more collaboration software or look for innovations that will build in efficiencies. Niven points to the fact that “during lockdown it made us really think about processes and where we can cut fat without cutting people.”
Blue Engineering has created its own software division to develop software for the company to streamline and automate tasks, “freeing us up to focus on more creative things, communicating with clients”.
Ultimately, communication is key. This is perhaps where many other sectors have taken lessons from the pandemic that the construction sector is yet to fully appreciate. Jones agrees, for example, that using remote tools effectively means he saves many hours on the road travelling to meetings.
Owen says that while she has good relationships with her local planning team and can often pick up the phone to them, this tends to be the exception rather than the rule. Rigid form filling where the architect’s version of the approval list is different to the planner’s is just one aspect of a system that still uses old structures to deal with modern expectations.
Jehu notes that 75% of a project’s lifecycle, in terms of time, occurs before a spade even enters the ground. “There’s very little we do have control over,” he admits. “But if technology can do a self-drive car, perhaps it can do a self-administering planning department? Our industry needs to evolve. It isn’t going to die, but we must adapt.”
The construction industry faces a perfect storm of challenges, from the cost-of-living squeeze to supply chain disruptions. The sector must learn the right lessons from recent years to seize the opportunities of the future.
In many ways, the past couple of years have been record-breaking for construction. Annual construction output increased by a record 12.7% in 2021, compared to the year before. This was the largest increase since records began, though it followed the pandemic-stricken 2020, which saw the largest decline in annual growth at 14.9%. On top of that, prices charged on work in the construction industry increased 7.3% in the 12 months to March 2022 – the strongest annual rate of output price growth since records began in 2014.
But these figures don’t tell the whole story. The recent dramatic rise in inflation, rising energy prices, materials shortages and uncertainty stemming from the war in Ukraine have driven extreme price fluctuations. The latest data from the BEIS materials tracker suggests that year-on-year prices for all building work rose by 24.5% from March 2021 to March 2022. Roof tiles rose 24% in a year, steel was up 25% and concrete reinforcing bars jumped an astounding 63.6%.
