Fine Margins: delivering financial sustainability in UK construction

The construction industry is a vital part of the UK economy. New research conducted for this CBI report shows 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.

There is a huge opportunity to build on this, making this vital industry more productive, more efficient and more environmentally friendly. A more productive industry has the potential to deliver £30bn more in output every year. To do so requires investment. Yet with average margins at the industry’s largest firms in the red, and construction routinely suffering more insolvencies than any other sector, the money needed is hard to find.

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.

Calling on business

This new CBI report, produced in collaboration with our members and with brand new research from Oxford Economics commissioned by the CBI, is both a call on businesses to break from poor habits, and on clients to bring new behaviours to the table. Intelligent procurement, putting contractors on a stable footing and unlocking investment throughout the supply chain will speed up the transformation of the industry that business, government and the public wants to see.

Better risk management will lead to many more projects being delivered on time and to budget, fewer disagreements ending in legal action, and greater trust between businesses. This healthier environment would support businesses to accelerate investment that can lift productivity, generating huge benefits for the economy. Research by Oxford Economics estimates that if productivity – measured as output per worker – grew just two percentage points per year above the baseline forecast, the potential annual value of UK construction industry output could be £30bn higher by the end of the next decade: an increase of more than a fifth, without increasing costs.

To deliver this kind of growth, and to go further, the industry must climb out of its productivity rut. Virtually half of the current roles in the construction industry are classed as ‘manual’ occupations, and 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.

This challenge can be met, by channelling investment into reskilling workers in manual occupations, and scaling up the adoption of skills to make better use of technology, digital techniques and modern methods of construction. Creating this more productive, higher skilled and higher wage industry is achievable – if businesses have the liquidity and long-term security to invest in training, technology and innovation now. To get there, delivering a step change in the way risk is managed will be a critical first step on a path to a financially sustainable, world-leading UK construction industry.