Home News FIS News Fine margins: delivering financial sustainability in UK construction?

A new report by the CBI provides interesting insight into the health of the UK construction sector.  Whilst it highlights that the construction industry is a vital part of the UK economy, it reinforces that the business models that underpin this are breaking.

The report starts by drawing out the importance of the sector noting that every £1 spent on UK construction creates £2.92 of value to the UK. The industry employs 2.3 million people directly – supporting over 3 million more indirectly – and construction activity contributes 6% of GVA.

In investigating why the operating environment is so precarious, the CBI Construction Council has looked at the role that risk allocation plays in the fortunes of UK construction. Poor risk allocation between clients and contractors prevents construction projects from being procured and delivered successfully, and the prevailing industry structure leaves major contractors and their subcontractors especially vulnerable to risk.

A rethink of the accepted wisdom in the industry’s business model is needed. As this report sets out, a series of behaviour changes are required across the industry to tackle the problem with risk and move towards a financially sustainable future.

The report acts as a rally call on businesses to break from poor habits, and on clients to bring new behaviours to the table.  Better risk management is highlighted as the major enabler and the report looks at how risk is squeezed onto the supply chain.

To report goes to look at the context of productivity when half the roles are classed as ‘manual’ occupations, noting that there are limits on how much more efficiency can be squeezed from such jobs. Additionally, labour shortages are more likely to constrain growth in the next decade: almost a third of the workforce are approaching retirement age, with 32.3% of workers (around 765,000 people) aged 50 or older.

Commenting on the report, FIS CEO Iain McIlwee said, “There is much in here that chimes with our own recent letter to the Chancellor and the work we are doing on the FIS Quality Framework – Product Process People.

Undoubtedly risk management is at the crux of change.  The report draws out some of the inherently unhealthy practices that are underpinning this.  In 1932 it was recognised that contracts should be balanced and JCT was born, it simply cannot be right that these contracts are often issued with pages of amendments that double the size of the document.  Clients should stop asking and we should stop accepting amendments to these contracts.  If enough clients did this and the public sector led the way, we would fix many of the problems overnight and make huge strides to improving culture.  My only criticism is that the report doesn’t dig far enough into the supply chain, we need to mirror these changes (like zero retentions and more time planning) through each stage.

We welcome the move to Integrated Project Insurance (IPI) that incentivises all those involved in an ‘alliance’ – this has the potential to drive real and rapid change.

One aspect where it does not go deeply enough is the opportunity to reconsider how we value buildings.  If we look to reward effective asset management and allow the building to be reflected in a more granular way on the balance sheet, people will start to consider how they manage and maintain that asset and, vitally, look in a more considered way at the reuse, recycle and rebuild options they can take.  It is not lost on us that a typical building will have upwards of 30 refits in its life!

Finally the report fails to offer solutions for the legacy that the industry carries based on all the conditions described that led to the total systemic failure that created the Grenfell Tragedy.  This is a real millstone around industry’s neck. We believe that a Building Safety Fund is essential to rebuild trust, at the end of the day if Government don’t step in as a line of first resort, they may well be the line of last resort and with less infrastructure around to help.”

Read the full report here

 

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