Building & Construction

COVID-19 has added uncertainty to a sector already facing challenges. Liquidity has been tight and may become worse as support schemes are tapered.

Sector trends & challenges

  • Reverse charge VAT

    Changes to VAT rules have impacted short-term cash flow throughout the sector, as well as increasing governance requirements

  • Societal shifts

    Societal shifts driven by COVID-19 may reduce demand for new residential and commercial units. Therefore even with government support, operators specialising in city centre office locations may face greater challenges.

  • Shortage of skilled labour

    In recent years, the construction industry has become increasingly reliant on EU workers. If immigration is limited due to a reduction in free movement, the skills shortage could worsen.

Sector rating profile

The building and construction sector has been the most prolific for business insolvency rates in the UK long term. Given the largest volume of market participants are within the SME community, these often fall below the threshold for press coverage. Common issues in the sector have been compounded in more recent years by the uncertainty caused by the COVID-19 pandemic, Brexit, and changes in the way we live and work. This has led to a rise in the caseload we are seeing and predicting for the period ahead.

Building & Construction

Sector background

The UK construction sector is a significant part of the UK economy representing around £150 billion output in 2020.

The sector is made up of thousands of businesses, with main contractors often supported on each project by multiple sub-contractors, skilled trades persons, architects, quantity surveyors and material suppliers. This makes the sector one of the most interlinked in the UK economy, supporting over 250,000 jobs in the UK across the three main sub-sectors: Commercial, Residential and Infrastructure.

The sector as a whole has enjoyed a prolonged period of positive growth since 2013, although there was significant variability in performance across the sub-sectors.

Traditional issues in the sector are low margins and skills shortages, which in 2020 and 2021 have been combined with the uncertainty caused by the COVID-19 pandemic, Brexit, and changes in the way we live and work.

All of this means the UK construction sector will continue to evolve, with new opportunities and challenges expected both now and in the future.

Current outlook

The construction sector has seen much less disruption from the COVID-19 pandemic than others, with many major projects continuing as planned following some initial delays to adjust to new working practices. This is supported by Markit PMI data, which showed that confidence sharply recovered following the initial lockdown at the end of March 2020. The effects of Brexit are however yet to fully work through into the economy and there remains the prospect and uncertainty of a potential recession, with subdued economic growth in the immediate to medium term.

Looking into 2021, industry forecasters are predicting construction output will rise 14% this year and 4.9% in 2022 (ONS, Construction Products Association). A key component in the overall outlook for the sector is the UK government’s commitment to infrastructure, with projects such as HS2 ensuring the pipeline looks strong in the medium term.

In the 2021 Chancellor's Budget further measures were announced including the launch of a £12 billion infrastructure bank and a £1 billion regeneration fund; however, commentators note this will only replace some of the funding lost from the EU. The Budget also stopped short of announcing further significant infrastructure spending to off-set the expected reduction in development projects within parts of the private sector.

Societal changes

The economic downturn and societal shifts may reduce demand for new residential and commercial units. Even with government support, operators specialising in developing city centre office locations may find greater challenges than suburban or rural low-rise housebuilding.

City Centre. Pre-2020 city centre projects may be mothballed, cancelled or repurposed. Reduced demand for city centre flats with concerns over fire safety and the ability to obtain mortgages due to cladding issues is likely to remain a major issue for the next 1-2 years.

Housebuilders. Away from city centre developments, housebuilders have reasons to remain cautiously optimistic. In aggregate, demand for housing continues to outstrip supply with UK house prices increasing by 7.5% in 2020 and the pivot away from city centre living for more outdoor space will benefit housebuilders. A continued low-interest rate environment, reduced rates of SDLT for the next few months and the return of 95% mortgages are a few factors collectively supporting continued growth.

Industrial & commercial. Online expansion is expected to continue to drive new investment in distribution networks. Investment in distribution & warehouse facilities is expected to continue, to expand the current logistics infrastructure across the UK and support the change in buying habits of retail customers. Government tax incentives (including the “super-deduction” until 31 March 2023) provide reasons for businesses to invest in the short-term.

Other considerations

There are a number of other considerations that are impacting the sector now and are anticipated to in the medium-term:

Reverse charge VAT. Introduced on 1 March 2021, these changes are impacting short-term cash flow impact, reducing working capital. The new regulations also require new reporting measures that need to be adopted across the supply chain which will increase governance and cost.

Skilled labour shortages. EU labour has played a vital part in the UK construction sector. According to the Construction Products Association there were 127,000 EU-born workers in the industry in Q3 2020, which is 28% down from 176,000 in Q3 2019. The impact of Brexit on EU-born labour is yet to be fully seen as the ‘churn’ of EU workers slows. Despite government incentives to boost domestic skilled labour in the 2021 Budget, investment in training and apprenticeships will take time to materialise and fill the current gap. 

New technologies. Efficient production and environmental practices are expected to become more important and drive growth. Modular building and other modern construction techniques have the potential to drive rapid change throughout the sector. Developing environmentally friendly construction techniques will take investment and time to validate and be accepted by residential and commercial customers, however efficiency and quality benefits are already apparent. Retrofitting / repurposing existing buildings is expected to offer an opportunity.

Aggressive tendering. Keen competition, cost price inflation and resultant margin erosion remain perennial challenges. Variability in raw material prices is expected to continue e.g. recent steel prices, due to supply and demand factors, as well as movements in the GBP exchange rate. Passing price rises up the supply chain will continue to be challenging leaving subcontractors exposed.

We expect the construction sector as a whole to remain relatively buoyant in the short-term, though as contract tendering criteria become more focussed and bonding is harder to obtain there will continue to be winners and losers. Good planning and strong management teams, supported by suitable systems and processes (including robust cash management), may dictate which businesses ultimately succeed or fail.

Find Your Expert

Steve Absolom is Interpath Sector Leader for what we call the 'Property' sector. This includes Building & Construction as one of three core segments. Neil Morley leads our approach to the Building & Construction sector nationally. For a full list of our senior people with experience in this sector use the button below.

Our senior team