The construction industry is used to dealing with the traditional peaks and troughs in demand that follow economic cycles, but the post pandemic era is posing complex challenges.

Rising interest rates and the associated cost-of-living crisis is coinciding with the end of the Help to Buy scheme in March 2023. Construction firms are having to find ways of dealing with uncertain demand, rising costs and a shortage of labour. 

Our recent research, based on a survey of businesses in the sector as well as interviews with industry leaders, finds that companies are particularly concerned by the war in Ukraine and its continued impact on inflation, which is making budgeting difficult. Some 70% of construction companies see geopolitical events and sanctions (and their impact on price rises) as a top long-term challenge, compared with an average of 56% across all sectors.

Laura Capper, our Head of Construction, believes the key to managing these issues is to apply some of the lessons of the past to today’s challenges. She says the sector has been on a big journey since the financial crash in 2008 and the pandemic, so the companies preparing for the future will be those that respond to a range of challenges with agile approaches.

According to the Office for National Statistics, at the end of 2022, the construction industry’s skills shortage is second only to food and hospitality. Meanwhile, the Construction Skills Network has estimated the industry needs to bring in and train more than a quarter of a million new people by 2026.

Laura believes the industry is aware it has a long-term problem with recruitment and that one solution is to attract more young talent. One way to achieve this is by showing people leaving education that the industry is inclusive and diverse, as well as one that offers a wide range of training, and “where people can develop technology and engineering skills”, explains Laura.

For Andrew Duxbury, CFO at UK construction group Galliford Try, the key is to actively go to schools and colleges to attract applications for the apprenticeships it offers every year.

“We need to make sure we bring in the right number of graduates, trainees and apprentices in the early stages of their careers,” he says. 

There is also the complication of the pandemic following so closely on from Brexit, which is impacting labour supply. Andrew adds: “The sector has always needed labour from both the EU and further afield, so we need to treat people well and develop them so they choose to come to Britain.”

Our survey shows that construction businesses understand treating staff well is crucial to attracting and retaining talent. Within three years, 64% of construction companies expect to be launching flexible working practices. And in the next year, 50% expect to increase wages and 46% plan to offer employee benefits.  

Andrew says Galliford Try staff got a pay rise in line with inflation during 2022 as well as a subsequent top up ‘cost-of-living’ payment at the end of the year. However, much of the overall offer goes beyond remuneration to ensure its people feel they are being well looked after.

“Pay is clearly important, but the proposition to employees is broader than that. People want to work for a company that shares their values and looks after them with wellbeing programmes. This helps us retain the best people and deliver our best work for clients.”

Our survey highlights that 66% of construction respondents feel their company’s purpose should be encapsulated in the products or service it offers and 52% say purpose should be seen in their everyday actions. Nearly one in two (48%) believe that this display of purposes will prevent staff leaving for a small pay rise elsewhere.

• Get involved in industry-wide initiatives to help bring in new talent.
• Apprenticeships for school leavers and graduates will help to ensure young people are entering the industry.
• Diversity and inclusivity programmes can be effective in widening the appeal of a company to groups who are currently underrepresented.
• Communicating company values to employees and offering wellbeing programmes are a good way to hire and retain talent.

Double-digit inflation has had an impact on all industries, particularly construction, and the rising cost of energy has put pressure on firms due to energy-intensive industries including concrete, steel and cement passing on the impact of higher prices. Construction businesses are also often reliant on many imported materials that are susceptible to supply chain disruption. 

Our survey shows that managing cost is the top priority for decision-makers in the sector. Some 76% rate managing inflation in their top three features of being a sustainable business (see chart below). 

One of the ways Laura sees construction companies getting future fit against such stark inflationary pressure is by de-risking contracts. This is increasingly being achieved by pricing projects on a ‘cost plus’ basis, ensuring the contractor is paid for any additional costs incurred through rising prices. 

This shift in how contracts are priced will give contractors reassurance that they will be reimbursed for spiralling costs but also give employers comfort that tender prices are reasonable and are not artificially inflated to factor in the risk of potential future cost increases.

Laura comments: “Businesses are starting to have productive conversations with clients about how to manage that risk more effectively. There is greater collaboration to achieve the common goal of effective project execution along with improved solutions and innovation.”

This need to understand risk when taking on a new project is leading to several ways to negotiate a contract, says Andrew. When the current inflationary cycle began, he found a lot of clients were slow Recognise the new cost levels.

“All contracts are a little bit different,” he says. “Some are based on a target cost reimbursable basis. This means you're aiming for a particular agreed price, but you get reimbursed your actual costs – there’s a mechanism for sharing any upside or downside.”

• Shift to cost plus contracts where the risk is shared between companies and customers.
• Sharing risk on future price rises can also be managed by sharing any upside, for example, giving a discount if costs decrease.
• Consider where it may be possible to use fewer resources, materials and reduced labour to get the same outcome.
• Join innovative programmes, such as the Transforming Construction Challenge, to create new ways to deliver projects more cost-effectively.

Whether it is delivering better performing buildings, which reduce an organisation’s carbon emissions, or retrofitting properties so they are better insulated, it is the construction sector that will deliver the projects that fuel the green economy.

At the same time, though, the industry must look at ways to reduce its own carbon footprint. Laura sees a mix of responses to the challenge of working in a more environmentally friendly way. Construction firms are aware of the need to embrace sustainability, however, when they are working on site, which often lack mains power, they currently have little option other than to rely on fossil fuels. 

That is not to say there is no room for improvement. Laura believes the pressure to embrace sustainability will come from within, because business leaders know it is the right thing to do. 

Customers are also now expecting construction businesses to show they are doing what they can to minimise their impact on the planet. “Clients are now starting to demand transparency of scope three emissions in their supply chains, and that is becoming a driver for businesses to take action,” she says.

Our survey shows the sector appreciates they could lose out on contracts if a company cannot display its green credentials. However, while 24% reveal they see a significant risk, 68% see a slight risk. The link between sustainability and securing contracts is most definitely there, but it is not felt as a major issue right now.

Laura suggests that part of the issue why this understanding of sustainability has not led to more pressing action already is that the industry is lacking clear green standards to build. At present there is no Government policy requiring the assessment or control of embodied carbon emissions from buildings – and with no singular policy, it means inconsistency and potentially non-conformity around building greener.

Asking fundamental questions around how projects are delivered is a good way for construction firms to start future-proofing their business. This not only involves project design and management but also whether it is more environmentally friendly to pre-fabricate parts of a building in a factory setting and then put them together on site. 

A useful strategy is to start with the parts of a business where executives have complete control. Andrew explains that Galliford Try uses electricity from renewable sources, wherever possible. It also limits its list of fleet vehicles to electrics and hybrids models. 

• Start the transition now to being a sustainable business, as clients are looking for partners with green credentials.
• Delivering more sustainable projects empowers a firm to pitch for the many contracts that are being created as the clients switch to greener building solutions.
• Consider powering offices through solar panels or renewable energy tariffs. 
• Arrange an electric connection to a site as soon as possible to reduce a project’s carbon footprint.
• Investigate off-site pre-construction (Modern Methods of Construction) for emissions and waste reduction, and also significantly lower costs from reduced onsite construction times. 
• Transition company vehicles to electric or hybrid. 

The economic volatility of recent years means construction businesses are well versed in dealing with continued pressures. 

Firms are having to address challenges in real time, meaning the industry is in a responsive mode, explains Laura. “The agility and resilience demonstrated to navigate impacts of Brexit, Covid-19, supply chain challenges and recent inflationary pressures, mean businesses are better positioned to weather the potential difficult times ahead. 

“Many operators have displayed robust governance and prudent financial and risk management. Continuing to be alert and agile to ongoing headwinds will be vital to survival,” she says.