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State of the industry: Construction's improvement comes at a cost

Exclusive data shows contractors are improving their performance on projects and client satisfaction, but profitability and skills challenges remain significant concerns.

Cast your mind back to the start of 2015: David Cameron was prime minister, Ed Miliband’s Labour Party looked like it might have a chance of winning power, and the construction industry was beginning to feel like it was on the road to recovery.

The industry posted strong growth in the first half of 2015, albeit with a slight slowdown around the time of the general election. Jobs creation was booming and suicide bidding had begun to look like a thing of the past, as power began to shift towards contractors who were able to pick better-priced jobs.

All of these factors pointed to an industry on the up – and that is largely reflected in this year’s Key Performance Indicators report from construction intelligence provider Glenigan, in partnership with the Department for Business, Energy and Industrial Strategy (BEIS), Constructing Excellence and the CITB, shared exclusively with Construction News.

The latest KPIs, covering more than 1,000 projects over £250,000 in value completed in the calendar year 2015, show that contractors have upped their game, with a record number of projects completed on cost or better. Client satisfaction with their contractors has again increased to reach its highest level for five years.

The industry has also improved its on-time predictability, with 55 per cent of projects coming in on time or better, compared with 48 per cent the previous year, indicating that contractors’ performance is beginning to improve in spite of high-profile problem jobs and cost inflation.

Cost and time predictability construction super pies

Cost and time predictability construction super pies

Source: Glenigan, BEIS, Constructing Excellence, BRE, CITB

But all of this has come at a cost.

The KPIs show the median pre-tax profit margin in construction was just 2.5 per cent, down from 2.8 per cent the previous year. Contractors have been squeezed on two fronts: clients are wanting more for their money, while materials and labour cost inflation have made it more difficult to manage costs.

What’s more, staff losses increased in this year’s report, with more direct employees leaving the industry, and while training levels and qualifications have improved, the statistics show that fewer young people and women are being attracted to construction.

All of which points to a ticking timebomb for the industry’s ability to deliver projects. The CITB reported in January that an additional 230,000 workers will be required by 2020 to meet the skills gap. The KPIs data suggests that, far from being addressed, this target is even further out of reach.

The KPIs also tell the story of an industry showing the first signs of a step-change towards greater productivity – but not at the rate required to make it a compelling choice both for young people seeking careers and a government looking to invest.

Predictability improves

Many contractors have had to work their way through legacy contracts won during the recession, and the latest KPI report suggests there has been marked improvement to match.

The indicators, which cover projects completed during 2015, showed that:

  • 64 per cent of construction phases were completed on cost or better
  • 55 per cent of construction phases were completed on time or better
  • 85 per cent of projects scored 8/10 or higher on client product satisfaction
  • 76 per cent of projects scored 8/10 or higher on client value for money satisfaction

During 2015, more construction phases were completed to cost than at any time during the KPI report’s 10-year history: 64 per cent was a significant improvement over the previous year’s 56 per cent, and is particularly strong when compared with the low of 44 per cent recorded pre-recession in 2006.

Similarly, 55 per cent of construction phases were completed on time or better, a marked improvement from the previous year’s 40 per cent and comfortably ahead of the low of 34 per cent recorded just four years ago.

Cost and time predictability construction non-housing super pie

Cost and time predictability construction non-housing super pie

Source: Glenigan, BEIS, Constructing Excellence, BRE, CITB

Across the sectors, non-housing construction saw the largest leap in cost predictability, hitting a record high of 67 per cent, up from 56 per cent. This was far ahead of pre-recession levels – only 43 per cent of non-housing construction phases were delivered on cost or better in 2006.

Housing projects also saw an 11 percentage point boost in cost predictability, with 62 per cent of construction delivered on cost compared with 51 per cent a year earlier. Again, this is a record high.

Cost and time predictability construction housing super pie

Cost and time predictability construction housing super pie

Source: Glenigan, BEIS, Constructing Excellence, BRE, CITB

Constructing Excellence chief executive Don Ward says the cost and time KPIs are the benchmarks that should “show that the industry is modernising”.

“[The KPIs] show the industry is controlling its processes – commercial and delivery – and is getting to a point where it is standardising, is reliable and can be trusted by its clients to deliver on cost and time,” he says. “It has got to that place with mega-projects, like the Olympics and Crossrail – it’s given clients a lot more confidence.”

“Contractors are stuck in the middle, being squeezed from both sides”

Lee Bryer, CITB

He adds that, in the current context of cost inflation and work won in the recession, an increase in projects coming in on budget was a significant improvement.

But while there have been improvements from contractors on cost performance, Mr Ward says the industry’s time reliability is “dismal, in the modern era”, with seemingly little long-term improvement.

Despite only marginal gains in time predictability, client satisfaction saw steady improvement, reversing a three-year trend of steady declines. More than three-quarters of clients (76 per cent) scored their contractors 8/10 or better for value for money, while this stood at 85 per cent for product satisfaction – the highest level since 2011.

Client satisfaction product and value super pie

Client satisfaction product and value super pie

Source: Glenigan, BEIS, Constructing Excellence, BRE, CITB

In a market in which developers had to work harder to entice contractors to bid for work, even on mega projects like Battersea Power Station’s redevelopment, the indicators bode well for contractors. Furthermore, 77 per cent of clients scored their contractors 8/10 or better for service, up from 73 per cent the previous year.

All of these might suggest a healthier industry from both a client and contractor perspective. But delving deeper into the data reveals evidence that this improvement has come at a cost to contractors.

Pressure on margins

The median pre-tax profit margin recorded by the data fell to just 2.5 per cent in the latest KPIs, down from 2.8 per cent the previous year, with margins now the second-lowest on record.

This tallies with research carried out by CN for this year’s CN100, which showed average margins among construction’s 25 largest firms was 1.8 per cent, according to their most recent results, down from 2.4 per cent a year earlier.

While the CN100 showed that overall margins among construction’s top 100 contractors rose to 2.4 per cent, up from 2.1 per cent a year earlier, the evidence from the industry is that contractors are still under severe pressure.

“Contractors are stuck in the middle, being squeezed from both sides,” says CITB research manager Lee Bryer. He points out some of the work factored into the latest KPIs was “bid at a different time” during the recession, but adds that these pressures have since been replaced by fresh challenges.

“It shouldn’t be that the industry is lying over and having its tummy tickled and saying that it can build anything”

Don Ward, Constructing Excellence

“In the current context, [contractors] are being squeezed on labour costs and materials costs, and ultimately that bleeds through to lower profitability,” he says. “Clients are demanding more – they want a higher-quality output while maybe not wanting to pay for it.”

However, Mr Ward says the industry needs to be smarter to mitigate cost demands. “Ultimately the client is entitled to change their mind [on a project], but there should be a dialogue to make sure the client is instructing that change on an informed basis,” he says. “It shouldn’t be that the industry is lying over and having its tummy tickled and saying that it can build anything [for the client].”

Pressures from clients have been mixed with pressures from elsewhere: significant increases in labour costs have hit certain trades, while wages have steadily increased to put more pressure on company margins. What’s more, previously benign materials costs have begun to rise. Steel prices, for example, are now rebounding following a high-profile slump.

All this adds up to a cocktail of pressure on contractors’ ability to deliver for clients, and will have a considerable effect on the workforce if it continues. Mr Bryer says the CITB’s fear is that this margin pressure will ultimately mean reduced investment in training and the construction workforce.

Industry gets older again

The latest KPIs show mixed results for contractors when it comes to skills investment, with the number of training days edging back up to record levels, while more direct employees are qualified to NVQ level 2 or higher than ever before.

The KPIs showed that:

  • Median staff turnover in construction was 2.7 per cent
  • A median of 7 per cent of direct employees in construction left employment
  • On average, 8 per cent of staff were aged under 24
  • On average, 17 per cent of staff were aged over 55

But alongside this, the median percentage of women employed across the industry has fallen for the third successive year, while the average number of people employed in construction aged 24 or lower continues to be of concern.

There was a increase in overall staff losses, with a median of 7 per cent of direct employees leaving employment this year, up from 6.3 per cent.

Though workloads were strong in the first half of 2015, a slowdown towards the latter half of the year contributed to this loss of staff, according to Glenigan economics director Allan Wilén, who says the latest KPI data “pulls the figure back in line” with the trend seen in previous years.

“The figures fit with us seeing markets quieten down somewhat last year,” he says, while adding that the overall trend in terms of qualifications and training has been positive. “There was a step-change from 2012 onwards when it comes to training.” 

The latest KPIs show that 72 per cent of direct employees are qualified to NVQ Level 2 or higher – a record high and more than double the 33 per cent recorded when the data was first collected in 2004. There has been further improvement in CSCS training, with 75 per cent of direct employees holding a Construction Skills Certification Card, up from 55 per cent the previous year.

“Contractors need to start thinking about what sort of skills investment they need to make”

Lee Bryer, CITB

Training days, too, improved to 1.5 days per full-time employee, up from 1.2 a year earlier – the first time this measure had improved since 2012.

The lack of training days had been slammed last year by KPMG’s UK head of infrastructure, building and construction Richard Threlfall, who argued that the previous level “doesn’t feel like enough to cover basic health and safety, let alone the training required to develop the skills to embrace technology and transform the industry’s delivery”.

An improvement in training days, albeit a modest one, should be seen as a positive move by contractors – albeit one offset by a reduction in the workforce. Mr Bryer says this was likely caused by a period of project uncertainty in the year, especially around the time of the general election, and that an increase in staff leaving businesses was “reflective of an offloading of risk”.

“With that level of uncertainty going forward, do contractors want to be carrying a larger workforce? Possibly not,” he says.

Uncertainty hits skills

However, data from the Office for National Statistics suggests falling staff numbers have moderated since the period covered by the KPIs.

The first half of this year saw two consecutive quarters of rapid job creation in the industry, after a significant decline in the first half of 2015. At 2.3m, the number of workers in the industry is now at a seven-year high – short of the previous high of 2.4m recorded in Q2 2009 – while employment in Q2 was also 5 per cent higher year on year.

But while the next KPIs should reflect a more positive trend for employment, the data points to a much more long-term worry for an industry still reliant on older workers.

The KPIs show the average number of people aged over 55 employed in the industry has increased for the third year running to reach 17 per cent, up from 14 per cent the previous year. At the other end of the scale, the number of people aged 24 or below has remained flat at 8 per cent, down from 12 per cent in 2012.

Mr Ward says these stats are “evidence of the skills shortage,” although he warns that the industry should not overcomplicate the issue of age. “I don’t necessarily get alarmed about the statistics pointing towards workers over 55,” he says. “It doesn’t seem particularly abnormal compared with what you’d see in the population as a whole.”

“Training has seen a step-change from 2012 onwards”

Allan Wilen, Glenigan

He argues that the current demographic of the workforce reflects an industry that “simply could not recruit” during the recession.

“When you look at the demographics of the industry today, you’ve still got a black hole [relating to the 1993/94 recession] – particularly in M&E – of people that were just not recruited in the first half of the 1990s,” he says. “That dip has gone through the industry ever since. I think we’ll see the same here, 20 years on, of a group of people from 2009 who never came into the industry – we will always be short.”

Investing in talent

But this lack of investment in a young workforce is among the consequences of increasingly tight margins, Mr Bryer argues, with contractors struggling to find the funds for training when cost pressures are ramping up.

“If margins are going to remain low, one of the ways contractors can improve their bottom line performance is through improved productivity,” he says.

“I would argue there’s a decent link between skills and productivity. Contractors need to start thinking about what sort of skills investment they need to make in that respect, including if they’re thinking about changing the make-up of their workforce.

“It may be one of the only ways that they’re going to see a decent return. Better productivity leads to a better bottom line, and maybe it will take a few bolder contractors to say, ‘Yes, that’s worth the investment’.”

The KPIs point to an industry which is improving, albeit gains in project and cost management continue to be offset by unsustainable margins.

With the uncertainty of Brexit on the horizon, maintaining the industry’s improvements on project performance while investing in skills to shore up its future remains construction’s biggest challenge.

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