Impact of the Recession on Construction Contractors
Impact of the Recession on Construction Contractors
The current crisis in the world’s financial system has left the construction industry facing its toughest challenges for a generation. Salaries are falling; job cuts are predicted to reach 400,000 in England alone; and the impacts look set to get much worse before they get better.
No country is immune from the impact of this and the UK, and much of the rest of the world, is already in, or about to enter a recession. Even buoyant construction markets such as the United Arab Emirates (UAE) are starting to feel the effect, with construction growth rate expected to slow from 20% to 15% in 2009 (Al Mal Capital). The United Nations (UN) predicts world economic output will shrink by as much as 0.4% in 2009 (UN’s World Economic Situation and Prospects Report, 2009).
These are serious times, however, the industry needs to be prepared to contribute to the recovery by retraining workers, maintaining the highest of standards of quality and supporting innovation. Construction professionals must not lose sight of their commitment to issues of sustainability, health and safety, ethical business practices and improved building standards. These will future-proof the industry and allow it to grow after the economy recovers.
Companies seeking to find an extra edge in an increasingly competitive marketplace are likely to employ greater innovation as they look to become more efficient. This could have far reaching benefits for the industry in the future, where innovation has never been more vital.
Construction Output It is clear that construction is in for a period of deflation. Forecasts suggest that there will be a 7% decline in output over the next three years, however, this figure is heavily contingent on Government spending coming through as planned (Construction Products Association).
In the second quarter of 2008 new order figures were at their lowest level since 2004; 14% below the average last year. Housing orders were down 30%, private industrial orders by 36% and commercial orders by more than £1bn from 2007 (Construction Products Association).
A rapid decline in private work has been partly propped up by more public sector spending, however the outlook for the private sector over the next few quarters is set to get worse. The Olympics will prop up the industry to a certain extent but the cessation of office development will have a much greater effect.
Overall, even if all public sector funding was spent next year, the construction industry in 2009 would still see the largest percentage of fall in output since the early nineties, when over 500,000 left the industry. This has been brought about by the sharp fall in private sector investment in construction – offices, retail, entertainment, as well as private house building.
Public Sector Spending The Government’s decision to bring forward £3bn of capital spending on infrastructure was cautiously welcomed by the construction industry (Pre-budget statement, November 2008).
Given the extremely high levels of borrowing that the Treasury is expecting over the next few years, there is a risk that Government will fund later debt repayments with cuts in capital spending on construction further down the track.
There is also a risk that delays in the Government’s existing build programmes will lead to increased under-spend. Programmes such as the Building Schools for the Future Programme have already fallen behind schedule, and reports suggest that this is as a result of bureaucracy rather than lack of funding.
Business Finance and Loss of Confidence According to the Confederation of British Industry (CBI), more than half of British firms have seen a decline in the ease of access to capital since the onset of the credit crunch; 30% of businesses have been, or expect to be refused new credit; and 78% expect business conditions to be worse next year.
The Government must urgently take steps to unblock the financial markets and improve the flow of capital to business.
The fiscal mitigation measures that were recently announced by the Chancellor (Pre-budget statement, November 2008) were not sufficient to address the underlying loss of confidence facing all UK businesses (and people).
More innovative ways could be investigated by Government to help the industry survive, such as providing credit insurance; relaxing bonding requirements on public projects; setting up project bank accounts; and providing tax breaks/concessions for sustainable construction R&D. At present, the latter has effectively ground to a halt largely as a result of the deeply entrenched uncertainty that abound.
Jobs & Loss of Skills Almost 400,000 jobs in the construction sector in England could be lost over the next two years (assuming GDP shrinks by 2.2% in 2009 and rises by 0.75% in 2010). It is predicted that the worst affected area will be London, where 23% of workers are expected to be made redundant (Public and Corporate Economic Consultants for the Local Government Association).
On the other hand, Eastern Europeans are responding to the downturn in the market by returning home, and this has eased the severity of the job situation in many instances.
Given the forecasts for construction output in 2009, it could be assumed that jobs in the public sector may offer more security than those in the private sector. This reinforces the need for Government to establish how an accelerated public spending package will be implemented. It is essential that the government makes sure timetables don’t slip, and that it does what it can to speed up deal flows and bidding times.
Through no fault of its own, the Construction Industry, in particular the house-building Industry, is having to dramatically re-structure and down-size merely to survive. The loss of technical resource and therefore expertise has been considerable and there are already signs that an upturn in the fortunes of the UK economy will not see these people return.
This is a real concern, particularly as the science and technology that underpins UK sustainable construction is becoming even more complex and at a time when we need experienced people if we are to meet our sustainability objectives. Furthermore, it is not something that can be addressed overnight by short-term training and/or education.
Procurement It has been reported that the credit crunch is likely to reverse the industry’s trend towards negotiated contracts and partnering. Instead, there could be a swing back towards single-stage, lowest bid tenders aimed at achieving the lowest possible outturn cost.
While single-stage tendering may be seen as a quick fix during the economic downturn, this does not take the long-term view, nor adequately consider best value for money. It does however provide a more risky financial environment which is likely to become a fertile breading ground for claims and liquidations as contractors cut their profits to secure work in a decreasing market.
Partnering has proved itself as the most efficient way of undertaking all kinds of construction work including new buildings and infrastructure, alterations, refurbishment and maintenance. Indeed the figures show that that in the four years from 2001 to 2005, £700m of public money was saved, and the potential for two and a half billion in savings, would have been feasible had best practice been adopted across the board.
When times are hard, best practice is at its most crucial to successful business.
Fraud An unexpected knock-on effect of the credit crunch has been a dramatic rise in worldwide construction fraud. Evidence suggests that the average construction company’s loss to fraud has increased by 69% in the last year (Kroll Global Fraud Report), driven largely by tough economic conditions.
A total of 890 senior executives participated in the worldwide survey, which covered 10 industries, with just over one-quarter based in Europe. More than 95% of the construction companies surveyed said they had suffered from corporate fraud in the past three years – up by 77% from last year’s survey.
Most frequent types of fraud occurring in the construction industry include theft of physical assets or stock, financial mismanagement, management conflict of interest, and corruption and bribery.
Companies will need to be even more vigilant than usual to reduce fraud in the construction industry.
Sustainability Opinion is divided about the impact of the credit crunch on the sustainability agenda.
A recent survey from the UK Green Building Council (UK GBC) suggests that while the conventional building industry suffers, the sustainable building sector is experiencing growth. Asked whether the financial crisis has impacted on their organisation in tackling sustainability, 56% of UK GBC members said sustainability had become a bigger focus. Only 18% said the credit crunch has had an adverse effect on efforts to address sustainability.
On the other hand, a survey of small-medium sized contractors suggests that tough government targets on sustainable construction are being missed, as buildings fail to achieve the standards set by the Code for Sustainable Homes (National Federation of Builders). The survey revealed that contractors appeared to be quite knowledgeable about the driving issues and regulations for sustainability, but in over half (53%) of projects tendered for, sustainability was not a client requirement.
Either way, it is important that new buildings, not least those procured by government, are of the highest possible environmental standards. Green building can be at the heart of a low-carbon economic recovery, boosting growth and creating green collar jobs. This is particularly true in existing homes and buildings, where we need a massive programme of refurbishment to cut carbon, reduce energy bills and produce more comfortable places to live and work.
By continuing to build using sustainable technologies the built environment will be preserved for future generations, and a proven record in sustainable design will be invaluable in gaining new contracts in the growing sustainable market.
Education and Training The future success of the construction industry depends on the availability of skilled professionals.
The credit crisis poses a significant threat to the number of students enrolling in graduate construction courses. Students may be apprehensive about pursuing a career in construction in this unstable climate. This would result in a loss of specialist skills, which in turn would hinder the recovery and future development of the industry.
Sandwich courses could be at particular risk because of the lack of available placements available. Many companies are reducing the number of placements they have for students or not taking on any at all. This could result in a reduction in the number of places available on the courses because they can not guarantee work experience placements.
Apprenticeships in the UK house-building industry have also suffered as a direct result of the credit crunch. However, opportunities still exist in the bigger public sector infrastructure projects such as schools, hospitals, railways and roads.
As a result of these risks the Government is working with Construction Skills to try and secure as many positions as possible for students. A new taskforce is being created to ensure that construction training is as effective as possible, and apprenticeship funding will also be increased to over £1 billion to try and prevent skill shortages (Department for innovation, Universities & Skills).
For professionals already within the industry, there is research to suggest that individuals with specialist skills or training could potentially gain a competitive advantage in the current economic climate (Chartered Institute of Management). The research predicts that professional qualifications could result in an additional £152,000 in lifetime earnings. It also suggests that a working knowledge of sustainable building and other innovative methods will be a particular advantage, with major projects on the horizon requiring an extensive skilled workforce in these areas.
It is important for employers to train and encourage further development if they want to secure the future of the construction industry. This will ensure that their workforce is properly trained in up-to-date techniques and will put them in a stronger and more competitive position to win new contracts when market conditions improve. Although it may be inevitable for some to make financial cuts to survive, it is crucial to maintain a constant number of new innovative minds that will allow the industry to recovery and continue to grow.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 14 January 2017
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