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Industry eyes opportunity in face of austerity

A turbulent 2012 meant the construction industry said goodbye to many long-established companies as a lack of finance and the struggle for work intensified.

Trading conditions are expected to get worse in 2013 before green shoots start to appear the following year, but there are sectors where there are encouraging signs that progress is being made.

The government’s announcement in December on the new private finance model – private finance 2 (PF2) was long awaited and has been generally well received. The industry will now wait to see whether the government is capable of bringing projects to market quickly.

In the public sector, the government’s drive to find 15-20 per cent procurement savings will continue, and each department is looking at innovative ways of improving processes – with varying degrees of success.

Sectors including highways and health, for example, are already increasingly asking contractors to help each other on major projects, either through alliances or shared pain-gain mechanisms.

Firms working in the public sector for major clients should – assuming the government continues to improve its performance as an ‘intelligent client’ – see a continual shift from first-past-the-post bidding and tighter margins to more innovative ways of procuring work.

Payment terms are likely to come under increasing scrutiny, with MPs having raised the issue on behalf of suppliers working on government contracts in the House of Commons before Christmas.

However, larger listed companies will be able to take more market share as smaller firms struggle due to weaker financing covenants.

“The important thing now is for the sector to manage existing contracts well, be sensible about work they are trying to win and let the unquoted sector really slug it out in terms of the work they want to win, and we’ll see more capacity come out in that area,” says Panmure Gordon analyst Andy Brown.

But cashflow will be weak, hitting balances and potentially putting dividends “under stress”, he adds.

“If you look back at 2012 there has been a constant message about cost control, trying to be more efficient, managing headcount, whether they can take out surplus offices,” Mr Brown says.

“I think that’s now ingrained – I think you’ll find that’s how companies will address their businesses from here.

“The problem for the larger contractors is that there are a lot more people involved, so the potential for more cost-cutting iprivs very real.”

There are new or relatively new faces representing and engaging with the industry this year, from MP Chloe Smith at the Cabinet Office and LOCOG chief Paul Deighton at the Treasury, to the new chief construction adviser Peter Hansford.

Construction minister Michael Fallon and housing minister Mark Prisk, both moved in September’s cabinet reshuffle, will need to do what they were put in post to do: deliver. The government is looking to construction for a shot in the arm for UK economic growth.

Another key political figure will be transport secretary Patrick McLoughlin, who will outline further plans for HS2 early this year and has a significant role to play in the government’s reform of roads funding under plans expected to be set out alongside the Budget in March.

One of the real success stories of 2012, the government’s building information modelling strategy, will continue to gain pace, with the Ministry of Justice set to be the first department to mandate BIM across its procurement processes this year.

One area being hailed as an opportunity is the government’s plan for an industrial strategy for construction.

The potential was highlighted by Travis Perkins chief executive Geoff Cooper in his inaugural speech as the Construction Products Association’s new chairman in November, and this week Peter Hansford has confirmed he will be working with the industry to draw one up.

Outgoing chairman Bill Bolsover, meanwhile, will strive to increase engagement between the Strategic Forum for Construction and the government in his new role as the forum’s chairman, while the CBI’s construction council will lobby the government on issues such as finance and public procurement.

Industry campaigns will need to make their voice heard, starting with Construction 4 Growth’s trade delegation meeting skills minister Matthew Hancock at
11 Downing Street next week, and Creating Britain’s Future beginning its national roll-out in Manchester later this month.

Campaigns will need to build on the success of the London Olympics in demonstrating the industry’s ability, while challenging negative headlines over late payment terms, warnings of an impending skills crisis and ongoing action over blacklisting.

Speaking in the House of Commons before Christmas, business secretary Vince Cable admitted the construction industry was going through a “torrid time” but failed to offer genuine hope that conditions will change anytime soon.

Yet with an election just two years away, the government is under more pressure than ever before to deliver schools, housing and major infrastructure in the hope that 2013 can be the start of a road back to growth for the construction industry.

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