Construction seeks stronger foundations for future growth

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.” 

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