27 February 2020
With ever-increasing demand to build new homes and transport infrastructure whilst cutting the UK’s environmental impact, there’s never been a more important time for the construction sector.
The construction industry currently employs 2.3 million people and contributes 6% to the UK’s GDP. But with average profit margins at the industry’s largest firms hovering around just 2.5%, construction businesses spending twice as much on legal services than other industries and a third of the workforce less than 15 years from retirement, it’s crunch time for the sector.
Fine Margins, a report by Britain's leading business organisation, highlights how better management of risk – eradicating unfair risk allocation between clients and contractors and embedding better procurement behaviours - will lead to more new buildings, homes and infrastructure being delivered on time and to budget.
‘Fine Margins’ shows that tackling these issues will create a financially sustainable construction sector, which can invest more in training and technology. In turn, if this investment lifts the productivity of the industry by just 2%, it has the potential to add £30bn to the UK economy annually by the end of this decade.
Josh Hardie, CBI Deputy-Director General, said:
“The UK’s construction sector employs millions of people and underpins the UK economy with every £1 spent on already creating nearly £3 of value to the whole economy.
“This is a crucial time for the construction industry with the demand for new, sustainable homes, offices and transport infrastructure on the rise. And all within the scope of rapidly improving the sector’s impact on the environment.
"By fixing the foundations of the construction business model between clients and contractors, essential new investments in skills, tech and innovation are possible and we can unleash the full potential of the industry.
“Adversarial behaviours built up over many decades coupled with problematic approaches to risk allocation and procurement have resulted in a business model that too often remains short-termist and unsustainable.
“It's why the CBI is calling for an industry-wide change that can deliver greater number of infrastructure projects on time and on budget.”
The CBI’s recommendations to ensure the long-term financial health of the construction industry include:
- Businesses should be prepared to challenge or walk away from contracts when bidding. Business leaders and boards should think strategically about the long-term planning and shareholder management required for such an approach.
- Public and private clients must make a credible and consistent assessment of balance sheet strength during the first stage of a procurement process.
- Major public and private clients should ensure they design their procurement processes with a distinct ‘first’ stage, so that early engagement with businesses can support risks to be identified, priced and allocated, before a second competitive process stage is undertaken.
- The use of single-stage procurements should be discouraged in major construction projects above a specific value.
- Future versions of Government’s Outsourcing Playbook should be seen as mandatory for public sector Building and Civil Engineering projects above a specific value.
On changes to the industry, Josh Hardie, CBI Deputy Director General, said:
”Businesses should be prepared to walk away from contracts where the terms are too onerous, or the price is too low. For public and private clients, it means committing to early contractor engagement and a move away from hurried single-stage tenders to ensure contracts are awarded effectively.
“The Government has a role to play too, using its purchasing power as a catalyst for change. It can incentivise better behaviours from suppliers and prioritise collaborative procurement. To jumpstart this change, the guidance in the Cabinet Office’s Outsourcing Playbook, due to be refreshed next month, should be applied robustly to all large-scale construction projects.”
Sir James Wates CBE, Chairman of the Wates Group and chair of the CBI Construction Council, said:
“This report usefully pinpoints risk management as a lynchpin for the sector and proposes specific recommendations for how government, clients, and industry players can work more collaboratively to manage risk more fairly. It’s vital for the good of the UK economy that we get this right, and I encourage all parties to take responsibility for the implementation of these recommendations.
“We in the built environment sector know that we have a broader and more profound impact than we’re often given credit for, and this CBI report, complementing new industry research published earlier this week by the Chartered Institute of Building, confirms this. We create the spaces, infrastructure and buildings that improve people’s lives. We’re economic multipliers, and these new reports help us demonstrate that impact.”