The ONS in February reported that construction output rose by 2.5% in 2019, driven by a 3.4% increase in new build work while R&M work contracted by 0.4%.
UK Construction Trends by Sector 2019
The public housing sector grew by 12% in 2019 as a result of completions, while the number of starts and new orders fell. The use of Section 106 to accommodate affordable housing into developments often means that this category is included in private housing and large fluctuations may be the result of potential inaccurate reporting. During 2019 the private housing sector remained subdued as a result of uncertainty among housebuilders and consumers alike.
Source - Experian
Infrastructure remained a driver for growth with projects like the A14 upgrade and flood defences continuing, however major decisions on infrastructure such as the final decision on HS2 were deferred to 2020.
Welfare and educational building showed signs of improvement with the recommencement of work on hospitals following the collapse of Carillion.
Within the industrial sector, warehousing remained buoyant driven on by the need for stockpiling for Brexit and the continued on-line retail growth. However, this was tempered by the poor performance in the factories sub-sector.
Private commercial was the worst performing sector in 2019.
Sectors Forecast for 2020 - 2022
For the period 2020 – 22 the average growth within the construction sector is projected to be around 1.6% per annum. This remains below the average that we have been seeing in recent years: for the last 3 years it has been around 2.4% and prior to that growth in 2014-16 was 5.6%
The government manifesto promised more housing and the removal of the local authority borrowing cap may help to increase activity in the public housing sector. An increase in consumer confidence may lead to more construction activity in the private housing sector. To this the government has promised to extend the Help to Buy Scheme to 2023 with a target of building 300,000 new homes a year by the mid 2020’s. Currently around 190,000 new homes are built, and it remains uncertain whether the target will be achievable due to sector capacity and funding. To assist with providing infrastructure to the new homes the government promised a £600m boost to the Housing Infrastructure Fund (HIF). This will provide funding for new infrastructure, such as new transport links and community facilities.
According to the Nationwide House Price Index report there was a house price growth of 1.4% between December 2018- 19. This was tempered by the fall in house prices in London and the South East. Some analysts are forecasting a recovery based on an increased demand for private and affordable housing. Since the general election Savills have reported a so called “Boris Boost” following the election with an increase in “super-prime” residential properties being sold since the election. Housebuilders will remain watchful waiting to see if the demand for housing increases through the year while house buyers will remain cautious with the Brexit developments.
Infrastructure will be one of the main drivers for the next 3 years with the Conservatives detailed in their pre-election promises their intention to invest £100bn over five years on road, rail and other infrastructure. As part of the government policies, government decisions will include new metrics to allow greater investment outside of London and the South East. This may impact on several high value schemes, Crossrail 2 is mooted as one high profile casualty with the new funding rules expected to be announced in the March budget.
Source - Experian
The government gave their go ahead for HS2 amid reports that the total cost is at least £80bn possibly raising to £106bn. The government is reviewing the scheme while examining the costs and looking at all the options for the phases north of Birmingham.
Despite the increased investment it will take time for many of the projects to commence on site so the full benefits of these will be seen in the next few years.
Another cornerstone of the election was the promise of increased funding for the NHS, including 40 new hospitals through non PFI schemes including the new Procure 2020 framework. Education continues to receive funding and the Priority Schools Building Programme phase 2 continues
The university sub-sector, which is covered in more detail later, has suffered from the impact of Brexit. Spending has slowed down although there are new projects in the pipeline including the University of Oxford “Life and Mind Building” and Aston University new business school.
Private commercial development will remain weak, but the rate of decline has slowed with returned optimism which will lead to a return to growth. The Retail sector will continue its decline with the trend from the high street to online shopping continuing and many chains are consolidating their high street presence or totally disappearing. The traditional supermarkets are increasingly looking to the smaller convenience stores and closing the larger supermarkets. Some growth is expected with the continued success of budget supermarkets and their plan to roll out new stores.
Skills & Labour Shortages
The demand for construction jobs continues to rise. Research by the CITB shows that the number of jobs required will be an additional 168,500 by 2023. This will mean that a workforce of 2.79m will be just 2% lower than its 2008 peak. The growth in construction employment since 2014 has been stronger in professional and managerial posts rather than trades.
The UK construction industry is reliant on foreign employees who make up 14% (rising to 54% in London) of the UK construction industry’s workforce, of which 51% are EU nationals. EU nationals are already leaving the UK with the sector set to lose up to 8% of its total workforce equating to potentially 200,000 EU workers leaving the UK. With the current shortage of skilled workers this will have the effect of pushing up labour costs as firms look to source workers.
The current freedom of movement between the UK and member states will continue to operate until the 31st December 2020 when the transition period, unless extended, expires and at that point any arrangements made in a free trade agreement or those adopted by the government under a ‘no deal’ scenario come into operation.
The withdrawal agreement includes the right for legal residency however the UK must be able to entice workers to remain. The inclusion of a favourable points system for skilled construction workers would help ease the shortfall faced.
The government has announced a British points system aimed at attracting skilled workers with assigned points for specific skills, qualifications, salaries and professions. Visas will only be awarded to those who gain enough points. Points will be gained by having a job offer, a salary over £26,500, being able to speak English, being in a skills shortage trade such as joinery or plastering. The government is currently considering a proposal by several industry bodies for providing EU workers visas under a clearing house scheme, where the trade body could contract the workers out to firms to alleviate potential skills shortages
Another option is a 12-month temporary scheme allowing EU nationals to come to the UK to work for a year. While this may be viable for sectors that require temporary or seasonal staff, the offering is unsuitable for the construction industry. This timeframe will not allow training or development of staff and employers will face the prospect of having to recruit during long term building and infrastructure work.
The CITB in their “Migration & Construction” report October 2019 commented that the industry is training more home-grown workers. By increasing apprenticeships, growing the pool of workers and looking to use technological advances an extra 44,000 workers could be in the industry by 2025. This is still well short of the 168,500 required.
Retention of students learning a trade at college needs to be addressed as only around a fifth of students continue in the construction sector. Reasons cited include them being ill equipped for the work environment and the subsequent reluctance of employers to hire them. To overcome this the CITB and trade bodies are piloting schemes to improve training and get them ready for work.
The Impact of the IR35 Rules
From the 6th April 2020 the government is revising its rules governing off-payroll working. Known as the IR35 rules this affects all freelancers & contractors who do not meet HMRC’s definition of self-employment. The legislation is designed to stop contractors working as ‘disguised employees’ and making sure that workers who normally would have been an employee are paying the same tax and National Insurance contributions as employees. This could apply if the contractor is employed to carry out the same scope of work over an undefined time period as a directly appointed employee.
The advantage of the PSC is that the employee accepts the increased risks & lack of employee benefits in contracting for the benefit of tax advantages. Employers benefit from not having an employee or worker on their books providing them with increased flexibility in their workforce planning along with reduced liabilities associated with workers’ rights.
This will have major significance for the construction industry, as contract / temporary workers are a popular method to fill companies’ skill gaps, especially for project-based work. Because of the temporary nature of projects roles between 30-40% of the workforce is self-employed compared to 15% of the total UK workforce.
Up to 6th April 2020, the IR35 rules only applied to the public sector, making the public sector responsible for determining the workers employment status. After this, all public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply. For a small sized private sector client, the rules remain the same.
The IR35 implications for contractors mean that many will be reclassified as employees and lose the tax-efficiency they previously had. It is estimated that the introduction of IR35 will mean a loss of approximate 20% of take-home pay for freelancers and contractors. To employ these people then the employer would need to cover tax, NI and benefits contributions potentially leading to increased costs being passed on in tenders. Many contractors who were effectively acting as if employed will now need to be employed in order to stay legal. It is anticipated that many will now look to become full time employees while employers wary of the new requirements will look to employ more permanent staff.
Climate Change & Carbon Reduction
2019 was once again one of the hottest years on record. Growing protests by ecological movements, climatic events with glaciers melting at record levels and the deadly bush fires in Australia dominated news headlines .
The construction industry is one of the biggest contributors to carbon emissions in the UK. The built environment accounts for:
- 45% of total UK carbon emissions (27% from domestic buildings and 18% from non-domestic).
- 72% of domestic emissions arise from space heating and the provision of hot water.
- 32% of landfill waste comes from the construction and demolition of buildings.
- 13% of products delivered to construction sites are sent directly to landfill without being used.
(Source: www.designing buildings.co.uk)
In February 2019, the Committee for Climate Change (CCC) report set out an action plan to tackle emissions from UK homes. This led the government to committing to zero carbon emissions by 2050 and this was followed by the Future Homes Standard in October. This proposes changes in Building Regulations in 2020 & 2035 to accomplish a 75% reduction in carbon emissions and the banning of fossil fired boilers in new homes from 2025
To achieve the reductions there are 2 options: -
- 20% reduction in emissions achieved by fabric improvements such as triple glazing, gas boiler and waste water recovery
- The preferred option is a 31% reduction attained as above plus technologies such as photovoltaics.
As part of their election manifesto the government has promised to invest £6.3bn for environmental upgrades to homes, such as grants for improving boilers and insulation.
Insolvencies – Well Established regional contractors
2019 didn’t see any insolvencies to the scale of Carillion, however insolvencies continued to make headlines. The trend continued with 76 firms going into administration during the 3rd quarter alone. Among the higher profile collapses were Pochin, Clugston and Shaylor and regional contractors like Marcus Worthington (North West) and Dribuild (South West) also going into administration in the worsening economic climate.
Rising input costs due labour shortages and a fall in Sterling causing imported material costs to have led to margins being squeezed. This coupled with delays to projects due to political uncertainty in 2019 and restricted credit facilities have led to many insolvencies.
The trend has continued into 2020 with the collapse of Symm & Company falling into administration citing tough trading conditions and an insufficient pipeline of work going forward.
The issue of late payments wasn’t addressed in the last parliament and there has been no sign yet of the government introducing new legislation to rectify this. It is hoped that a bill will be brought forward at some point in 2020.