Industry concerns rise as labour and credit conditions worsen

    Workloads in the UK construction sector continued to grow solidly, bolstered by a series of big infrastructure projects, but momentum is expected to slow as issues with skills and credit conditions weigh heavily on firms. That’s according to the RICS Construction & Infrastructure Monitor for Q2 2022.

    Looking at the all-sector level, +30% of respondents reported a rise in workloads in Q2, down slightly from +34% in Q1. Workloads are being driven mainly by infrastructure projects, as 43% more respondents reported a rise in activity in this area than a fall. But private sector workloads also remain firmly positive, albeit slightly less so than in the previous quarter. The net balance for private residential workloads came in at +29%, down from +38%, while the private commercial net balance was +25% down from +28% previously.

    Despite the relative strength in current workloads, the impact of labour and material shortages, and the resulting rising costs associated with both, is being felt across much of the industry. A scarcity of materials was highlighted by 83% of contributors, and 77% said that they were experiencing labour shortages. Significantly, 60% of respondents identified problems recruiting quantity surveyors, which is the highest share since Q4 2018.

    Financial constraints are seen as an increasing issue too, cited by a net balance of 54% of respondents. And with interest rates rising, credit conditions are anticipated by a growing proportion of respondents to deteriorate further over the next quarter and the next year (-40% and -45% respectively).

    Whilst 12-month expectations for workloads remain positive, albeit less so than before (+27% of respondents compared to +40% previously), profit margins are projected by respondents to be dented as material and labour costs continue to rise. The profit margin outlook indicator slipped back into negative territory with a reading of -14% in Q2.

    RICS Chief Economist, Simon Rubinsohn, commented: “Feedback from RICS members suggests construction activity remains firm and that it is likely to continue to grow solidly over the coming year despite broader macro challenges, partly as a result of ongoing work on a series of big infrastructure projects.  However increasing concerns are beginning to be expressed about the deterioration in credit conditions particularly for smaller businesses in the sector which is also now visible in the worsening insolvency data. Despite this, the sector continues to grapple with challenges around recruitment with over three-quarters of respondent to the survey indicating they were facing labour shortages. And unsurprisingly, it is in the area of skilled trades where this shortfall is most intense.”

    RICS Senior Public Affairs Officer, Euan Ryan, added: “Construction is critical to the success of the UK economy. The Government must set out a vision for long-term investment in upgrading UK infrastructure, play a leadership role in enabling the decarbonisation of the sector, and work with industry to mitigate the triple threat of rising costs, materials shortages, and skills shortages”.

    With the conditions facing construction firms deteriorating, RICS is calling on the incoming Prime Minister and Cabinet to act quickly to support the sector.

    RICS is calling on the UK Government to:

    • Commit to continued investment in upgrading the UK’s infrastructure and provide a long-term vision for the future pipeline of activity, allowing the sector and supply chains to plan accordingly and address potential barriers.
    • Act quickly to mitigate the triple threat of rising costs, materials shortages, and labour supply, by reassessing visa requirements and ensuring efficient transit of materials.
    • Lead by example in procuring for value over price, prioritising quality and the lifecycle. management of cost and carbon. This should incorporate novel best practice standards, including the Value Toolkit and ICMS3.
    • Play an active role in encouraging inter-disciplinary training and adopt a procurement method that encourages vertical integration and greater efficiencies, in order to drive up productivity in the sector.
    • Commit to fostering a culture of collaboration and conflict avoidance between the private and public sector, and across the supply chain, including implementation of the Conflict Avoidance Process (CAP).