Since the beginning of the economic downturn, many businesses in the UK construction industry have rushed to win work in what has been regarded as the more reliable and productive public sector. For over two years these companies have benefitted from the Government’s attempts to kick-start the economy through continued public spending on construction projects. The result is that we now have a construction industry which is more heavily reliant on public spending than ever before. In October 2010, half of the top 20 Clients and promoters in the UK construction industry in terms of project value were public bodies.
Now, in the wake of the biggest public spending cuts since WWII, it is being suggested that the majority of the publicly funded projects will dry up over the coming months and years. It has already been suggested by the media that the demise of two major players, Connaught and Rok, is partly attributable to the squeeze in public spending. These companies were heavily involved in public sector contracts and their failure has been, at least in part, put down to increasing local authority cuts, particularly in social housing budgets.
So, what does the future hold for the UK construction industry?
In announcing cuts in public spending, the UK Government emphasised the importance of private sector growth in balancing out the potentially devastating effect which the reduction in public spending would have in certain sectors of the economy. Much of the commentary on this concept has described it as the private sector “stepping in to fill the gap” left by the public sector. Is this wishful thinking on the part of the Government’s analysts, or are there indications that the private companies are able to provide the work soon to be lost in the public sector?
Figures published this month show that the private sector in Scotland performed worse in the last quarter of 2010 than during any other quarter since the recession began in April 2009. It may therefore come as a shock to many that there are some hopeful signs that there is work out there in the private sector. Despite poor retail results during the tail end of last year, many supermarkets are expected to drive growth going forward: Tesco and J Sainsbury both have development programmes worth around £1.6billion in the pipeline while supermarket Waitrose is expanding and is likely to spend £200million on construction in the next three years. Whitbread, who own budget hotel chain Premier Inn, have £300m to spend on hotels in 2011 while developer Land Securities has announced three major London developments to begin in 2011.
These green shoots of growth however, are incapable of supporting the entire industry. This means that those hungry for a slice of the private sector pie will need to be highly competitive as Clients with work to give are in the position to become increasingly selective. Of course, in the current economy, building a good relationship with existing Clients is just as vital as attracting new ones but for those looking to find new sources of work, what are Client’s priorities likely to be?
Following the collapse of many in the construction industry Clients will no doubt be increasingly interested in the condition of a companies’ balance sheet. Reliability and stability are now increasingly important as it becomes a priority for Clients to be sure all members of their supply chain can survive the duration of a project. Of course, as the market becomes more competitive, Clients can and will demand more experience in their type of work than was previously required; this experience will need to be as relevant as possible to the project or development the Client is undertaking. The rush to public sector work over the last few years may mean that some companies may struggle to show recent experience of private sector work and may also find themselves lacking the contacts needed to get ahead in the private sector.
Just as with public work in recent months, Clients in the private sector will increasingly require greater efficiency to be demonstrated by companies before they will contract with them. This means that, as well as more experience, Clients will also demand more competitive prices and extended credit terms of their contractors. This in turn will force contractors to obtain lower costs from their subcontractors and, ultimately, the whole supply chain will be squeezed. The need for efficiency will, of course, create a need for innovation in order to find new ways to work to push down costs. A company’s sustainability credentials are also likely to be more carefully scrutinized than they have been in the past, given the increasing Government pressure on the private sector to produce environmentally friendly developments.
As for public sector work, there are projects which will carry on despite the spending cuts. One example of this is the new Forth Crossing project for which an estimated £2bn contract has recently been put out to tender. However, in other areas such as social housing and schools, many projects have been scrapped and it is highly unlikely anything other than essential works will go ahead. It is clear that, for most in the construction industry, the private sector is the best place to look for new work. The Government may be somewhat optimistic about the amount of private sector work out there, especially in light of recent figures suggesting a lack of growth in the private sector, but there are signs of hope. However, the competition for these contracts is likely to be high and the Client will be the one to gain from this; demanding, and receiving, more for its money.