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Construction recovery: cautious optimism from a cliff edge

20 October 2020: Things are very precarious for construction across the globe, but there are opportunities to shake things up, embrace tech, and reach for public sector investment.

Cash flow, project completion dates, supply chains and resourcing have been huge issues for construction globally during the pandemic. Economic analysts GlobalData downgraded sector growth to 0.5% in April and warned that construction in Western Europe was likely to shrink by 1.9% in 2020. Indian construction is forecast to shrink by 7.5%, while in the US, the sector is expected to decrease by 6.5% in real terms.

Matthew Thorpe, managing partner at chartered accountants Haines Watts, has seen first-hand the current difficulties facing his construction clients, but he’s cautiously optimistic, despite significant challenges within the sector.

“Turnover in the sector has definitely been hit and there have been huge numbers of projects put on hold, but everyone in the industry is saying the same thing – the work isn’t going away, it’s just been delayed or postponed. So we’re not seeing projects cut off totally, they’re just rolling into next year.”

In the short-term, however, firms are losing money. With paused projects and a reduction in available tenders, many firms have a dilemma on their hands. As Thorpe explains, firms must either trust what they’re being told by clients and stakeholders – that the work will go ahead, just not now - and lose money in the short term while they wait, or they cut overheads and reduce staff in the short-term. Once the go-ahead is given, the firms who have opted to save money by making cutbacks will then be under-resourced and must invest more upfront in hiring and procurement costs. “All this is leaving firms in limbo,” says Thorpe. “How long can businesses sustain themselves on the promise of work tomorrow?”

Larger construction firms are in a stronger position. With bigger cash reserves, a turbulent few months won’t wreak havoc in the same way it would for smaller players. There’s another reason why larger players may have the edge over their smaller counterparts. Construction firms are often asked for performance bonds as insurance for successful project outcomes, but whenever there is a shock to the market, insurers cut the availability of such bonds; it’s often just the larger players who can obtain them.

“The insurance bond market has always been a huge driver behind the survival of the fittest,” says Thorpe. “Those with a strong balance sheet and plenty of cash reserves will present a lower risk than recently-formed, cutting edge contractors who haven’t got the assets or cash to insure against.”

Many fresher, more innovative companies could therefore go out of business because they’re not mature enough to survive the crisis. Yet Thorpe believes the pandemic could, in itself, present an ideal opportunity to shake things up. 

“The bond approach just doesn’t work in the modern world anymore. The market needs to be more amenable to alternatives such as putting money in escrow, otherwise we’ll end up losing the more innovative players.”

From a recruitment and hiring perspective, many of the major industry players pressed pause on their hiring mandates while high numbers of self-employed subcontractors were laid off in March. 

“Senior management have taken pay freezes and cuts to keep as many employees as possible on their books,” says Simon Robinson, MD of Red Diamond Executive Headhunters. Hiring has also stalled, but there are some reasons to be optimistic.

According to Simon Rawlinson, head of strategic research at Arcadis, the Chinese construction sector has returned to normal after managing to control the outbreak. Northern European markets such as Germany, Poland and the Netherlands also managed to keep sites open. Italy, France, Spain and Ireland have been badly affected, however. 

“The ultimate recovery is likely to be driven by the public sector, which puts the construction industry in Europe and the UK in a good place, given governments have already pledged major rebuilding and net-zero programmes,” says Rawlinson.

It’s a view shared by Robinson, who points to the Road Investment Strategy (RiS2), HS2 and the government’s hospital building programme which will see six new hospitals built by 2025 at a cost of £2.8billion. “2021 and beyond could be a very big year for the industry,” he adds.

Thorpe believes that for the sector to fully recover, there needs to be move away from performance bonds and a move towards a joined-up collaborative approach to ensure successful project outcomes. The UK construction sector runs predominantly on hierarchy: every firm in the chain puts more financial pressure on the person below them.

“If clients are already putting their main contractor under that much financial pressure which feeds down the chain, when times get hard, the already skinny margins will just disappear altogether. It’s no longer sustainable to work like this.”

Since the pandemic, Rawlinson says the industry has responded positively to collaborative working under the guidance of the Construction Leadership Council, of which Rawlinson is a member.

Through the guidance, which was predominantly around Site Operating Procedures relating to social distancing and infection control measures, clients also supported their supply chains through early payment and in some cases, adopted a flexible approach to contractual obligations associated with pandemic-related delays. “Generally, clients have played a very positive role in the crisis,” says Rawlinson.

Day-to-day working practices on sites themselves appear to have changed too: Both Thorpe and Rawlinson have noticed an acceleration in the use of digital technologies on construction sites such as Building Information Modelling (BIM), 3D printing, drones and virtual reality.

As Thorpe points out, the pandemic has speeded up technological innovation. The same is true for the growing demand for datacentres and huge out-of-town warehouses.

“The move towards bigger warehousing and datacentres had been a gradual evolution but now consumers have turned en masse to online retail and we’ve seen a massive online boom, so the construction sector is having to respond to this demand. The value of these projects is huge and far outweighs anything else of a similar size. I think it’s tipped the scales in favour of a buoyant active construction sector in the not-so-distant near future.”

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