Andy Beard is global head of cost and commercial management at Mace. Having explored the macroeconomic and microeconomic pressures on the construction sector, he now examines how contractors can overcome the factors holding them back.
The impact of high interest rates and inflation for contractors is well-known – but how can they navigate the rocky road ahead?
The best hope lies with public sector and infrastructure projects, where there is likely to be less need for borrowing. However, there is a caveat. The government is making clear its focus on bringing down debt and carefully managing public finances – with HS2 being a stark example of this.
“Even if the current political disarray makes change unlikely within this government, the issues are not going away and will still be relevant after next year’s general election”
The challenges on HS2 show that the government is not always a reliable partner. Putting on hold parts of the project has caused damage to the supply chain, including job losses. It is also not clear it will result in the savings touted, not least because stubbornly high inflation is likely to push up the final cost of the project. The delays also harm development opportunities across the nation, preventing widespread economic growth.
Furthermore, with the government choosing not to increase previous funding promises in line with inflation, other projects are facing severe shortfalls in funding. Against this backdrop, while the public sector and infrastructure pipeline is relatively healthy, expecting a greater pick-up would seem a big ask, and downside risks exist.
With interest rates and inflation taking a toll on the sector, we must collectively find a way to push through. Risks around insolvencies across the supply chain are high, while the sector’s skills capacity and the need to decarbonise the built environment remain prominent challenges.
Keeping the industry stable and moving forward needs responsible actions from all; we must leverage opportunities to embrace innovation, improve productivity, remove waste and enhance value. By doing so, we will come out of this cycle of uncertainty in the best possible position.
In order to get around these challenges, there are some steps the government should take to implement policies that support industry to get on and deliver.
Even if the current political disarray makes change unlikely within this government, the issues are not going away and will still be relevant after next year’s general election. The failures of the housing market lie at the heart of many of the UK’s problems, and given growing intergenerational inequalities, fixing it is more important than ever.
The challenges extend beyond housing to development and infrastructure more generally. In April, the National Infrastructure Commission (NIC) published a report laying out a set of recommendations to improve infrastructure planning. It’s a process in dire need of a shake-up.
Consenting times have increased from 2.6 to 4.2 years, and there has also been a jump in judicial reviews during this time. Both factors create significant problems to both public and private developments, often bringing otherwise-viable schemes to a grinding halt, whether temporarily or indefinitely. Uncertainty is a nightmare for business, and not being able to make long-term plans about the pipeline of work holds back investment. It is positive that the government is aware of the issues raised by the NIC, but there needs to be a firmer commitment to adopting the recommendations in full in order to drive the urgency that will get the industry ticking as it should.
We need to have a serious conversation about the balance between local community wishes and the needs of the wider population and economy. We often see local politics impeding the progress of schemes, with the watering down of housebuilding targets by Michael Gove last year showing the strength of the collective backbencher voice. Clearly, local needs form a major part of sustainable development, but this is the time for the government to stand strong in the face of genuine nimbyism and do what’s right for the nation.
At a practical local level, local authority cuts over the past decade have led to a reduction of capacity and capability within planning departments. But it’s not all about government. Industry needs to look at where it can get better too.
Only around half of consented schemes make it to spades in the ground. While this is, in part, down to the inefficiency of the planning system creating backlogs for developers and stunting cashflow, these firms need to hold their hands up and acknowledge the games they play. Amendments to approved plans, seeking additional storeys or ancillary buildings at the loss of green space, for instance, elongate the process and introduce the risk of legal challenges yet again. It’s a game of cat and mouse, with the winner unclear, leaving those looking to get on the housing ladder as the losers.
This inefficiency needs interrogating; central government needs to think long and hard about the steps it can take to drive out the blockers at the local planning level. There is likely a case for both carrot and stick. Exemplary schemes, such as those offering green affordable housing, may justify greater funding, whereas those who do not build-out within a certain amount of time after gaining planning could have to pay penalties.
Rules and regulations
Building Regulations are also deterring housing investment. The two-staircase rule is the most obvious example of this. At Mace, we’re aware of a number of developers delaying projects due to this. More worryingly, some developers are choosing to keep schemes on hold as they believe regulations are set to tighten further. By worrying that rules are likely to change again in the near-term, investment is slowing. Clarifying the Part B Building Regulations and ending this uncertainty would help unlock this investment, but this isn’t due to happen until October 2023. Ministers surely need to simply turn on the news to realise now is the time to act.
Bringing the focus back to industry, there needs to be a stronger uptake of the Construction Playbook. Initially released in 2020, an updated version was published last year, but still too many public sector schemes only tangentially refer to it. Some of its core aims, such as driving standardisation, creating sustainable win-win, long-term contracts, and producing better economic outcomes are evidently important given current market conditions.
Concurrently, the playbook needs to be assessed and adapted so that it can become the baseline for private sector projects too. With the private sector’s greater risk-taking ability, there’s plenty of scope for two-way sharing of best practice if industry leaders approach collaboration with an open mind (and if the government provides the imperative through policy).
It wouldn’t be a list of suggestions for government without asking for financial support. Nonetheless, if there is one area where fiscal intervention is justified, it is the pursuit of the UK’s net-zero goals. Stimulating green investment and the transition to a green economy could come in many forms, such as removing VAT on retained structures.
Similarly, expanding schemes such as the Green Heat Network Fund, which at £288m is lower than Scotland’s Heat Network Fund, could help open up some larger housing developments. Additional money also needs to be found to support life-long training and education. One of the largest complaints as to why the Boiler Upgrade Scheme is failing to meet its targets is because of a lack of trained installers. Government needs to provide more joined-up, longer-term thinking in order to provide the confidence individuals need if they are to commit to a vocational education.
It’s a complex scenario and one could argue that it’s easy to point to government for a solution. But it’s also fair. I started my first article of this two-part series explaining how major political decisions, responses to international events and fiscal policy have resulted in the economic quagmire the country finds itself in. We mustn’t be too quick to forget this when we assess the state of our industry.