Every £1 spent on construction creates £2.92 of value to the UK economy.
That’s according to a new study by the CBI and Oxford Economics, called Fine Margins.
The figure is an 8p increase on the £2.84 multiplier identified in a study by L.E.K. Consulting just over a decade ago.
With average profit margins of just 2.5%, construction businesses spend twice as much on legal services as other industries and a third of the workforce is less than 15 years from retirement, the CBI report found.
But tackling those issues would create a financially sustainable construction sector, which can invest more in training and technology, it added. In turn, if this investment lifts the productivity of the industry by just 2%, it has the potential to add £30bn to the UK economy annually by the end of this decade, the CBI claimed.
In order to ensure the long-term financial health of the construction industry, the CBI has recommended:
- Businesses should be prepared to challenge or walk away from contracts when bidding. Business leaders and boards should think strategically about the long-term planning and shareholder management required for such an approach.
- Public and private clients must make a credible and consistent assessment of balance sheet strength during the first stage of a procurement process.
- Major public and private clients should ensure they design their procurement processes with a distinct ‘first’ stage, so that early engagement with businesses can support risks to be identified, priced and allocated, before a second competitive process stage is undertaken.
- The use of single-stage procurements should be discouraged in major construction projects above a specific value.
- Future versions of government’s Outsourcing Playbook should be seen as mandatory for public sector building and civil engineering projects above a specific value.
Josh Hardie, CBI deputy-director general, said: “The UK’s construction sector employs millions of people and underpins the UK economy with every £1 spent on already creating nearly £3 of value to the whole economy.
“This is a crucial time for the construction industry with the demand for new, sustainable homes, offices and transport infrastructure on the rise. And all within the scope of rapidly improving the sector’s impact on the environment.
Fixing construction business model
“By fixing the foundations of the construction business model between clients and contractors, essential new investments in skills, tech and innovation are possible and we can unleash the full potential of the industry.
“Adversarial behaviours built up over many decades coupled with problematic approaches to risk allocation and procurement have resulted in a business model that too often remains short-termist and unsustainable.
“It’s why the CBI is calling for an industry-wide change that can deliver greater number of infrastructure projects on time and on budget.”
Sir James Wates CBE, chairman of the Wates Group and chair of the CBI Construction Council, said: “This report usefully pinpoints risk management as a lynchpin for the sector and proposes specific recommendations for how government, clients, and industry players can work more collaboratively to manage risk more fairly. It’s vital for the good of the UK economy that we get this right, and I encourage all parties to take responsibility for the implementation of these recommendations.
“We in the built environment sector know that we have a broader and more profound impact than we’re often given credit for, and this CBI report, complementing new industry research published earlier this week by the Chartered Institute of Building, confirms this. We create the spaces, infrastructure and buildings that improve people’s lives. We’re economic multipliers, and these new reports help us demonstrate that impact.”
Iain McIlwee, CEO of fit out trade body The FIS, said: "Undoubtedly risk management is at the crux of change. The report draws out some of the inherently unhealthy practices that are underpinning this. In 1932 it was recognised that contracts should be balanced and JCT was born, it simply cannot be right that these contracts are often issued with pages of amendments that double the size of the document.
"Clients should stop asking and we should stop accepting amendments to these contracts. If enough clients did this and the public sector led the way, we would fix many of the problems overnight and make huge strides to improving culture. My only criticism is that the report doesn’t dig far enough into the supply chain, we need to mirror these changes (like zero retentions and more time planning) through each stage."