Revenge of the subcontractors - coming to a building site near you?
Yes, most commentators are upbeat about the construction market but we have new problems: lack of supply and rising prices.
Good news does not always sit well with the construction industry. We are a bit like farmers, always complaining about the rain and then moaning about the possibility of drought when the sun is shining. Now, against type, it seems a whole range of commentators are positively ebullient with enthusiasm about the changing fortunes of our sector. Just as the economy went off a cliff in 2008 it appears as though it is ascending equally as quickly up the economic incline as we move towards 2014.
According to the Institute of Chartered Accountants’ Business Confidence Monitor, the economy as a whole is set to grow by 1.3% towards the end of this year. Apparently this is, by and large, stimulated by construction activity as much as anything else. Confidence in our sector is now greater than any other in recent times and has shot up from a lacklustre -3.9 this time last year to just under +40 in the equivalent quarter in 2013.
For myself I am delighted to be writing something upbeat but am also wary of the sector enjoying a, too much too soon, scenario.
In “real” terms in the “real” world, outside of survey-land, we are beginning to see work increasing outside the residential sector which has previously captured all the headlines. Commercial is back, mixed use is growing and even a bit of retail has been spotted with M&S for instance recently investing in a store refurbishment programme. Also this increase in activity is not just confined to London. We are seeing other parts of the UK picking up and this has helped push the confidence indices upwards.
For myself, I am delighted to be writing something upbeat but am also wary of the sector enjoying a, too much too soon, scenario. I am not sure that the new governor of the Bank of England, Mark Carney, a Canadian, has ever seen the UK construction industry in full flow. If he had, then he should be worried. We used to be responsible for just under 10% of gross domestic product - we now represent around half that amount and should we grow, as we are doing at present, we will undoubtedly be a major influencer on inflationary pressures in the UK economy. This is especially pertinent, as the wages and materials bills start to rise.
Should we grow, as we are doing at present, we will undoubtedly be a major influencer on inflationary pressures in the UK economy.
To take a basic example, according to some estimates, the humble house brick has jumped from 45p per unit a year ago to 85p a brick for a batch requiring immediate delivery now. With 30 out of 80 brickworks closed since 2008 it is taking time to get up to full capacity again. The labour force is also beginning to flex its muscles. We have lost a whole generation of trades men and women at the craft level in this long recession. I notice that the three main construction unions, meeting last month, rejected a pay offer of a 4.5% pay rise over the next 33 months.
So are we beginning to see “revenge of the subcontractors” as lack of supply and increasing demand becomes apparent. They can be choosy about for whom they work and what they should be paid? The M&E sector has been particularly badly hit during the recession with many forced under by a combination of uneven cash flow, uncertain work pipeline and unsympathetic bank managers. I am told that some contractors in the South-west are now being very careful about for which projects they will tender. If the job is too specialised, the contract terms deemed unfavourable or there are over six firms on the tender list then they will decline to become involved it is said. This is eventually going to feed through in terms of tender auctions with the clients having the deepest pockets being the only ones able to hire from a shrinking pool of experts. It could not be long before we start seeing the return of the “loadsofmoney” economy where comedian Harry Enfield so accurately portrayed and lampooned the greed and opportunism that haunted the last period of accelerated growth the industry enjoyed.
Why is this relevant? Mr Carney back at the Bank of England has few levers available to control inflation, and raising interest rates is one. The irony could be that low interest rates was one influencing factor that contributed to confidence returning to the housing market which in turn itself fired up confidence in the rest of the construction industry. We may yet live to witness the residential market as a whole being rocked by a sudden forced increase in interest rates caused by the boom in a construction industry that fired up the economy in the first place. That would be an unwelcome irony that would wipe the smiles of the most optimistic of seasoned observers.
Richard Steer is Chairman of Gleeds Worldwide