A commercial approach to deliver robust, long-term growth for construction
Since our Q2 UK Market View analysis was published at the start of July, the UK has a new government with a strong mandate to deliver on its change agenda. The initial market reactions to this news have been as close to ‘business as usual’ as you could expect given the scale of the Labour Party's landslide victory, but then, the result was widely forecast, and markets are usually reassured by predictable outcomes.
The role of construction in delivering the growth that the government is looking for is a key driver for a sustained economic recovery. Understanding the fiscal inheritance and assessing the art of the possible, whilst pulling policy levers that can catalyse priority projects, is the commercially astute route for government to take as it goes through the gears that will drive change and growth.
In our Q2 UK Market View, we reported that improving the fortunes of the construction industry will take time. For all the reinvigorated political will, with the stimulus measures being introduced by the new UK government in the King’s speech, and the welcome news that the economy grew again during May, this is still the case.
Balancing cost, creating value
During the next steps, and in the approach to the Budget slated for later in 2024, addressing the priority order for delivery in energy, housing and infrastructure will rely on a blend of strategic impetus and, more practically, shovel-readiness. At the root of shovel-readiness is the question of cost and value.
For example, in housing, new development appraisals in recent years have struggled to meet the required hurdles to get out of the ground, being increasingly dependent on private sale revenue to cross-subsidise affordable tenures and broader contributions through planning gains. At a time of higher interest rates and constrained wage growth, this has posed a level of risk that has seen development programmes de-risked, scaled back or deferred to a more promising point in the market cycle.
In infrastructure, cost risk has been compounded by a broad range of other factors, including planning risk, contractor insolvencies and supply chain capacity but, as market conditions become more favourable, hurdles will become easier to jump, and the potential to deliver will improve.
Unlocking growth, from project to programme
What’s clear is that, with growth front and centre of the new government's agenda, understanding how cost and value can be best balanced to generate that growth and unlock the potential of programmes, and the projects which they’re comprised of, will be fundamental. The challenge will be how to make each project wash its face financially.
Meeting this challenge will be the catalyst for change at project level; one way to achieve this is to prioritise long-term, or even the lifetime benefits in terms of both revenue and outcome, to help surmount near-term challenges. This will, in turn, drive programme level growth and will also attract inward investment from the private sector, private equity markets and other sources.
Project-by-project, this approach will cumulatively help shape the long-term, overall growth that we are committed to achieving in partnership with government and our clients across the public and private sectors nationwide.
Bridging the generation gap
In an industry facing a consistent rate of attrition, particularly as the workforce ages, we anticipate an upward pressure on labour costs as more markets compete for limited resources when it comes to the availability of skilled people. It’s possible that digital transformation will go some way towards mitigating this and will support productivity gains but, again, this will take time as optimal ways to integrate new technology evolve. In our forecast, we predicted that tender price inflation will rise to 4% in London and nationally by 2028, with this price growth pegged to steady rather than cause spectacular growth in construction output.
This slow and steady approach to growth is likely to yield positives in the labour market. As the industry benefits from greater stability and predictability (rather than shorter-term boom and bust cycles), it will prove more attractive to those seeking a career in the trades (as well as to investors). Along with a broader raft of initiatives to develop a diverse, inclusive workforce, and increase the industry’s appeal to Gen Z and emerging talent in the wider workforce, this holds the potential to create value and moderate inflationary trends.
Taking a long-term view on the special relationship
Of course, there are global geopolitical events outside of our control which have the potential to disrupt an improving picture of resilience in the UK. In our Q2 UK Market View we explored the potential ramifications of a second Donald Trump presidency in the US for the UK construction industry next year. The prospect of increased uncertainty, protectionism and raised tariffs, inflationary pressure and rising interest rates that this could bring all have the potential to impact the UK and our industry - although there may be a silver lining in the form of reduced competition for commodities bringing down the cost of materials.
While it may be too early to consider these risks, recent events may bring them closer. For the time being, what is within our control, is how we work together as an industry to support our new UK government’s growth agenda and help drive it forward. We can do this by anticipating challenges, bringing forward solutions, and taking opportunities to redefine how value is both created and measured from pre-delivery to post-completion operational management.
Again, particularly on major programmes and projects, taking a long-term, commercial position to cost and value, which factors near-term political cycles and then calculates beyond them, will be key. Through early engagement, creative and effective procurement, developing capacity, innovation and an end-to-end approach to close collaboration between clients, consultants, contractors, sub-contractors, and the wider supply chain, we can keep achieving optimal outcomes and drive the industry forward.
