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Mon October 26 2020

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Consultants forecast 100,000 more construction jobs to go

29 Nov 10 A report by management consultant PwC and law firm Pinsent Masons says that construction output will fall by 4.5% and almost a further 100,000 jobs will be lost by 2014/15.

With the cuts to government capital spending, consolidation and business failures in the construction industry are inevitable, the report warns. However, a stronger, more productive industry could result if the industry responds to the challenges in the right way.

The report is based on a series of roundtable meetings with business leaders working across all sectors of the construction industry and recommends industry action to become more efficient.

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.”

Among the key findings of the report are:

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  • Supply Chain Fragmentation: 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, while 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 uncertain, 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% of materials are wasted. Labour productivity can be low in construction compared to more 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.

Richard Laudy, partner and head of Pinsent Masons’ construction sector, said: “The industry must step forward and work with the public sector to create new and better ways of working. There is a possible conflict between the National Infrastructure 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, added: “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: “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 innovative businesses are likely to prosper.

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