Ground Engineering Solutions

What’s wrong with the Government’s new Construction Sector Deal?

  • What’s wrong with the Government’s new Construction Sector Deal?

As part of HM Government’s Industrial Strategy, a new Construction Sector Deal was quietly published on the 5th July. Just to be clear, this piece isn’t a criticism of the content of the deal by any means. There are excellent proposals here, particularly around apprenticeships, reform of the CITB and use of public procurement to encourage skills development & protect SMEs in terms of payment. The commitment to the National Infrastructure Plan is also commendable. Some of the language is a bit woolly, particularly around innovation (a word used far too much!) and sustainability (this is perceived as a good idea but a broad “mission” is set out to halve building energy usage by 2030 – no specifics, no new ideas). We’ll set out our own ideas on sustainability and a “carbon rate-of-return” in a separate blog post. Perhaps the woolly language can be forgiven as being aspirational if thin on detail.

Our main concern with the strategy centres around the “Business Environment” section. Nothing here grasps the major problems with the construction industry which are:

  1. Desperately low margins and further downward pressures on margins owing to economic headwinds
  2. Stubbornly low productivity improvement with little sign of improvement
  3. Significant debt levels and the head wind of interest rate hikes as part of fiscal normalisation
  4. Failure of clients to grasp risks and basis of costings

Items 1 and 4 above have been seen in the gruesome detail of abundant material effects in the on-going fallout of the Carillion collapse which we won’t rehash here. We’d point to the EY research note of last year to highlight the particular issue of margin pressure. In fact this note is part of a trio which highlight indicators pointing to structural weakness in the construction industry as an economic sector.

There was an excellent article in The Economist last year which examined the gross lack of productivity gains, particularly in comparison to the agricultural, manufacturing and wholesale & retail economic sectors. In fact, a study by McKinsey Global Institute has revealed steady declines in gross value added since the 1970s. The article highlights that the main failure of the industry is prolonged deficiency in sustained investment in itself largely owing to the well-known cyclicality of the industry and its broader exposure to macroeconomic volatility (Item 3 above). BIM, offsite construction and automation will help with efficiency but the industry is notoriously slow to change.

The most striking example we read recently that goes to Item 4 above is that of HS2 and its failure to meet target costs.  Its failure to adopt geotechnical baseline reporting as a risk allocation tool is being cited as contributory. Giving the good results reported by Crossrail and what is anecdotally being reported from Tideway, it seems logical that the next big SPV for major infrastructure delivery would be keen to adopt the system. This just seems remarkable.

In sum, the new Construction Sector Deal is treating the symptoms rather than the illness. Change, if it comes at all, will be in excruciating increments.

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