Spending Review forces major change for construction

The key findings are based on a series of executive roundtables with business leaders working across all aspects of the construction industry.

An analysis undertaken by PwC estimates  construction output will fall by 4.5%, with almost a further 100,000 jobs being lost in construction by 2014/15, due to capital budget cuts across UK Government departments.

PwC and Pinsent Masons highlight a number of key findings from the report:

Supply Chain Fragmentation: The report highlighted that a highly-fragmented supply chain within the industry is a major barrier to achieving greater efficiency. Compared to other major industries construction has remained inefficient whilst overcapacity is also both a cause and a function of construction’s highly fragmented supply chains.

Capacity Reductions & Market Consolidation: Pinsent Masons and PwC believe that greater supply chain integration and more efficient procurement will inevitably lead to consolidation as smaller and less-efficient businesses find it increasingly tough to compete and remain independent.  Consolidation will be particularly acute for SMEs in construction and acquisitions by the majors of both healthy and distressed businesses is likely.

Collaboration: Collaboration is key to delivering higher levels of efficiency to meet the challenges ahead. Streamlined procurement models are key to driving efficiency.

Engagement with Public Sector Clients: Businesses need to understand the ways in which the public sector wants to do business in future.

New Approaches to PFI Procurement: The Treasury has indicated that it will outline new approaches to PFI procurement and it is imperative that the industry provides its views and engages effectively with the process. With the decline of public capital it is inevitable that other models of funding are pursued. These might include sovereign wealth funds, dedicated infrastructure investment fund and Tax Increment Financing schemes. Funding remains a very fluid issue, and it is likely that the industry will have to innovate in the way in which projects are funded.

Reducing Waste: Eliminating waste is a major opportunity to reduce costs and create more efficient processes. As much as two-thirds of deliveries to sites take place at the wrong time, for example, and some 15 per cent of materials are wasted. Labour productivity can be  l0w in construction compared to modern and highly efficient manufacturing industries.

Local to Global: The global construction market is currently worth $7.5 trillion, and is predicted to grow to $12.7 trillion by 2020 with faster growing  emerging construction markets in countries such as Brazil, China and India accounting for much of this growth.  The threat of international competition which is already evident in the UK construction market is likely to increase.

Expert comment on the report findings from PwC and Pinsent Masons:

According to Chris Temple, construction strategy partner at PwC:

“The Spending Review will make or break the construction sector. It is inevitable that the recession and reduced capital spending by government will give rise to casualties. There are a number of areas where construction companies must, as a matter of priority, respond decisively.  The Spending Review focuses urgent attention on a number of long-running themes and trends that have created barriers to greater efficiency in the UK construction sector. Only those businesses that are able to drive innovation and change are likely to survive and prosper.”

Richard Laudy, partner and head of Pinsent Masons’ construction sector, commented: 

“The industry must step forward and work with the public sector to create new and better ways of working. The industry recognises that it needs to do a lot more than criticise government as an ineffective or inefficient procurer; it needs to work to create its own ideas to solve shared problems. As the public sector works towards greater efficiency, the industry needs to become an effective partner, helping to deliver approaches and solutions that can overcome the significant challenges that lie ahead.

“Now is the time for the industry to look towards the faster growing emerging construction markets outside UK. On the other hand, businesses need to be aware of new international competitors in the UK market.”

“There is a possible conflict between the National Infastructure Plans focus on major infrastructure projects and the Coalition Governments localisation agenda. The Sector will need to think carefully about the competing demands of national and local government. Opportunities with local government should not be overlooked. "

Fraser McMillan, partner and head of Pinsent Masons’ Scotland office, commented:

“The construction industry should view the Spending Review as a challenge. Those in the industry that embrace the change required by the review will be less wasteful, more efficient and able to act quickly. Greater standardisation will play its part in driving costs down, but the industry will also see a fundamental shift in the way it approaches production: rather than producing orders in bulk, the industry will adapt to a new way of thinking in order to be able to produce smaller orders efficiently.”

Jonathan Hook, partner and global leader for  engineering and construction at PwC, said:

“Many people in the industry feel that change is long overdue. Some of the immediate challenges facing the industry may well be resolved as a result of short-term measures that can be taken relatively easily; but not perhaps without some degree of pain. Companies need to plan for the probable cash outflows associated with a downturn in contracting volumes and monitor counter party risk carefully in respect of both clients and the supply chain. But the CSR may also be the final push for an industry that has to date found it hard  – or hard to find sufficiently compelling reasons – to make more profound structural changes.”

Pinsent Masons and PwC concluded that, while the reduction in capital spending by government will inevitably lead to consolidation in the construction sector, the reduced spending also offers the opportunity to make the industry less wasteful, more cost effective and more productive. However, both Pinsent Masons and PwC warn that only those businesses that are willing and able to drive innovation are likely to prosper.

The report is available to download from:

http://www.pinsentmasons.com/pdf/NewRealitiesForConstruction.pdf