Light at the end of the tunnel for UK construction sector

'Ghastly' year comes to an end with increased opportunities across market

After a ‘particularly-ghastly’ 12 months, the construction sector will see a degree of stability return during 2016, leading to a steady growth in orders and high demand for specialist products.

2016 will be a year for businesses to invest in people, processes and technology, to create a platform for what could be many good years ahead

Richard Threlfall, head of infrastructure, building and construction at KPMG, told BBH that 2016 would mark the start of several years of increased activity in the sector, providing a wealth of opportunities for companies across the UK and further afield.

“2016 will be a good year for the construction industry,” he said. “Labour supply and price pressures will start to ease, and the industry should be able to start focusing on securing steady growth in what will be a strong market. It will be a year for businesses to invest in people, processes and technology, to create a platform for what could be many good years ahead.”

This comes after a challenging 12 months for the industry. KPMG’s own report - UK Government Construction Pipeline: KPMG Analysis - published last autumn, indicated there had been a total decrease of 886 - 28% - in construction and infrastructure projects since the previous pipeline analysis in December 2014, dropping from 3,148 to 2,262 by August 2015.

Threlfall said: “2015 was a particularly-ghastly year for many firms, who have been knocked off-course by losses on legacy contracts signed too cheaply in order to maintain volume in the depth of recession. But, it seems unlikely now that there are many more skeletons in the cupboard and as restructurings of businesses in the sector work through, a degree of stability should return.

Recent months have seen output dip, and forecasts have been revised downwards. But it is clear that this is not reflective of underlying demand, which remains strong

“Recent months have seen output dip, and forecasts have been revised downwards. But it is clear that this is not reflective of underlying demand, which remains strong, particularly in commercial and civils.

“That demand is being suppressed by rising wages, which are causing clients to delay and re-scope schemes. Eventually recruitment into the industry will start to dampen that cost pressure and supply and demand will gradually move back towards equilibrium over the course of 2016.”

And he urged companies to take advantage of the improvements.

Barbour ABI predicts an upturn in construction activity from 2016

“For the supply chain, the outlook is really good,” he said.

“Companies that have real specialism will be in hot demand, particularly those operating with highly-skilled labour which will remain in short supply, for example in electrical engineering. Subcontractors will continue to hold the balance of power for at least the next year and conditions remain ripe for consolidation in the industry, with overseas buyers continuing to take a very close interest in the UK market.

It seems unlikely now that there are many more skeletons in the cupboard and as restructurings of businesses in the sector work through, a degree of stability should return

“I believe construction demand will remain high for many years. The Government is committed to infrastructure programmes, which will take decades to deliver. 2016 is, therefore, the year for businesses in the construction sector to invest and build the capacity and capability to take advantage of this strong domestic market.”

Michael Dall, lead economist at Barbour ABI, agrees the market is picking up. He told BBH: “The third quarter of 2015 in construction saw an increase in new order values despite the wider slowdown in growth across the UK economy. In particular, the infrastructure sector experienced strong gains in the third quarter. These are the types of major projects that have been scarce in recent year, so they provide a welcome fillip to the sector and, after further funding was confirmed in the Comprehensive Spending Review, future prospects for infrastructure have improved significantly.”

But he warns that the ongoing skills shortage could threaten the stability of the marketplace unless addressed.

“Overall, the levels of appetite for investment across construction remain strong at the contract stage,” he said. “However, the problems lie more on the supply side at present, with skills shortages, in particular, a major challenge in moving projects from the conceptual to the delivery phase.”

This fear is echoed by recruitment specialists, with a recent survey by Ionic Recruitment revealing that eight out of 10 building contractors fear a lack of skills is holding business back.

Subcontractors will continue to hold the balance of power for at least the next year and conditions remain ripe for consolidation in the industry, with overseas buyers continuing to take a very close interest in the UK market

The survey showed that 72.5% of contractors struggled with skills shortages in 2015, while 82% believe the issue will have a detrimental effect on their bottom line in 2016.

Martyn Makinson, managing director of Ionic, said: “The New Year will highlight some old anxieties for many contractors.

“The construction industry has introduced a range of initiatives this year to try to combat the chronic skills shortages. However, the scarcity of key personnel continues to hold back the sector.

“The health of the construction industry should be a concern for everyone as its problems impact the cost and delivery of projects.”

The construction industry has introduced a range of initiatives this year to try to combat the chronic skills shortages. However, the scarcity of key personnel continues to hold back the sector

He added: “People are the raw materials that will help a business grow, but competition has returned to the jobs market in a way that impacts the bottom line. In a candidate-driven marketplace, construction companies need to present themselves as attractively as possible. It’s also imperative that they sell themselves well at interview stage to prospective candidates by focusing on career and skills advancement opportunities, which, from experience, are more-important factors than a salary increase.”

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