The future of construction: opportunities and challenges
Read what key industry leaders had to say, and our key take away messages on the future shape of the construction industry.
On 24 February 2021 Colette Morgan-Ford, Cassandra Auld, Ingrid McGhee and Patricia Grinyer held a virtual roundtable with ten key industry leaders in construction i.e. contractors, MMC manufacturers, developers, house builders, local authorities, and academics. The key leaders discussed (i) the sector impact of the COVID-19 (including latest lockdown); (ii) post Brexit world (i.e. disruption, labour changes and UK subsidy laws); (iii) Modern Methods of Construction (“MMC”) and the Construction Playbook principles. Below, we have set out what the likes of Morgan Sindall, Clarion Housing, The Wee House Company and Portakabin had to say, and we have summarised our key takeaway messages.
Stuart Parker, Managing Director, Morgan Sindall (Scotland)
COVID-19 impact and latest lockdown
As a tier 1 contractor working across England, Scotland and Wales we have adapted well to different rules in each nation e.g. in the first lockdown non-essential construction activity in Scotland was closed down, but, at that time, we put detailed COVID safe operating measures in place across all projects in all areas, in line with Public Health guidance and the Construction Leadership Council’s site operating procedures. We also worked closely with Construction Scotland, Scottish Government and other stakeholders to develop the Scottish Safe Operating Guidance. It is a “situational” issue whereby requirements may alter from one site/area to the other – e.g. on some larger projects we introduced lateral flow testing to capture asymptomatic cases, but, our preventative measures have worked and positive tests have been low. In terms of output, some projects have been delayed however, social distancing measures have resulted in benefits too, e.g. improved quality and better site safety with less trades working in parallel/close proximity.
Brexit and materials price rises
We work very closely with our supply chain and understand that material price increases of at least 5% are anticipated across the board. Inflation is exacerbated by Brexit and the impact of COVID-19 on global shipping. One supplier informed us that a container of materials shipped from China to the UK previously cost £1100 but now costs £11000. We are doing all we can to manage the risk of delays and inflationary pressures by maintaining early engagement with the supply chain and panning far in advance.
Labour changes and skills gap
In the last two years and perhaps in anticipation of the post Brexit world, we saw a gradual decline in percentage of EU migrant workers in Scotland, and we also saw an increase of workers mobilising down to Southeast England to work on major projects. Regardless of the decline in access to EU migrant workers, the sector does have a skills gap in any case. Modern Methods of Construction has a key role to play here as a transition to a ‘manufacture and assembly’ approach will reduce the demand on traditional trades. The Government, customers and Tier 1 contractors can drive this by signalling an intent that gives the supply chain confidence to invest in these methods of working.
Greater support to protect the fragile supply chain and more investment in apprenticeships schemes and skills training across the UK also has an important role to play.
Modern Methods of Construction (“MMC”)
In my opinion, it has a significant role to play in the future of construction and by that I mean all forms of MMC rather than just 3D volumetric (modular). There are many different MMC options (including MMC components used in traditional builds) and it is about finding the right solution for specific projects. One size does not fit all e.g. some project types may always be better suited to traditional methods of construction rather than modular builds. Either way, the key to finding the best solutions is engagement of stakeholders (including supply chain) early in the procurement conversation. We certainly do that at Morgan Sindall and I know it’s a key principle in the Construction Playbook.
Elaine Fleming, Technical Manager, Wee House Company
Benefits of modular construction
Cheaper, quicker, greener, safer, and smaller more efficient labour forces. Plus, greater use of local labour gaining significant skills from grass root levels in factory build conditions. The Wee House Company is a ‘one stop shop’ volumetric off-site timber framed modular house builder. 80% of build is completed in our Ayrshire factory before being delivered to site. Our in-house site teams travel ahead to each project to install access, connect services, undertake the groundworks and form the foundations. Once manufacturing is complete, we transport the house to site and we re-assemble in situ. It takes as little as 2 to 3 weeks for manufacture, delivery to site and completion for a standard Wee House. Although we have seen some delays and disruption on delivery of materials/price increases/and occasionally, prolongation, we have suffered less than traditional construction because (apart from first lockdown) we have continued to work to capacity all year round in factory conditions without the usual risks e.g. idle time and/or damage to materials caused by inclement weather. We offer standard and bespoke modular home options for private clients as well as volume house building for development sites and affordable homes. We are a BOPAS accredited company and we can provide warranties and a guaranteed lifespan to match traditionally constructed homes. We are high on quality and sustainability and very low on waste. Even small timber off cuts are assessed through quality control and returned back into the process for use wherever viable.
It would be helpful (i) if more tenders were written to fit modular construction including a cost analysis model that is fit for off-site manufacturing; and (ii) if there were standard form contracts designed specifically with modular construction in mind (hopefully, it will evolve). I have heard that funders and insurers can sometimes struggle to understand risk profile and how it all fits together e.g. if the employer has a contract with an off-site manufacturer and a separate contract with a D&B contractor. We prefer to control the process (one stop shop) and have warranties and insurance in place to deliver the full package service in contract directly with end clients (rather than as a D&B sub-contractor). Sometimes we’re presented with a design prepared by others who had traditional construction in mind and we’re asked to deliver it as modular solution, but, that often does not work (e.g. problems with floor plans or roof types). We have explained to clients that engaging us early is key (before making costly decisions) and, preferably, we will be asked to undertake a feasibility study so that we can define the parameters and set out how best to build. In terms of title, during the off site manufacturing process, we are paid on an interim basis; keep a detailed inventory; valuers attend the factory on a regular basis and label items that have been paid for by the client; vesting certificates are then issued and title of those items passes to the client.
We were as prepared as we could be for the post Brexit world. Last summer: (i) we stopped using many EU suppliers due to Brexit uncertainty, but, even our Scottish suppliers often need EU components (e.g. window frames procured in the UK but delays to delivery of glass from the EU) so, some delays and price increases have still occurred; and (ii) we started bulk buying our standard modular materials from UK (rather than EU) suppliers (resulting in increased cost but less delay). Bulk buying was possible because of the size of our factory, which is even sufficient to include a quarantine area for newly delivered material. Our strategic decisions have enabled us to continue building affordable homes safely at scale in factory conditions, despite the Brexit and COVID challenges.
Listening to our communities
In terms of the COVID-19 impact, we’ve been careful not to generalise as we appreciate that transmission rates vary across regions and decisions that we make in our factory in Ayrshire could impact on some of our builds in e.g. the Scottish Highlands where transmission rates are much lower than in central Scotland. We have consulted with our communities in order to establish whether they are comfortable with us travelling north to our sites and staying in their community during the working week. We are building affordable homes, so most communities have welcomed us provided we comply with sensible rules e.g. we have created a process of project and transport bubbles. Where the communities have had safety concerns, we have respected that and delayed on site building until restrictions can be lifted.
Richard Cook, Group Director of Development, Clarion Housing Group
Clarion is the largest housing association in England with 125,000 homes and 350,000 tenants. There are two sides of the business, first, looking after our tenants and existing homes, and secondly, new built where we are currently working on 80 live projects. Undertaking repairs and maintenance to existing homes (some over 100 years old) was challenging in the first lockdown as residents were reluctant to allow access. However, we have since then developed very good safe working practices and procedures, so our repair and maintenance rates are now at pre-COVID levels. On new build, we work with 20-30 third party delivery partners and during the pandemic have consistently seen a “can do” attitude. From 25 years in construction I know that it has a reputation for not changing often, and only changing when it has to. However, COVID has seen the majority in the sector step up and adapt well to the challenges. We have seen some project delays but many positives such as better planning, some productivity increases and improved sustainability/reduced waste.
Pricing and cultural behaviours
Speaking as a client, pricing volatility is a real issue – it does not allow me to plan and does not fit into a viable business model. For all of the reasons we have discussed, I’m expecting this to be challenging for the next 12 months before we find a new normal when, hopefully, materials prices will revert to pre-COVID levels. However, price increases are not simply a product of the pandemic. Over promising at tender stage (including 2 stage competitive processes) and notifying project cost overruns late in the day has been systemic in the sector for decades – it’s a cultural problem that still needs to change.
Pamela Mitchell, Director, Development and Asset Management at Regent Capital
Delays to planning process and pricing volatility
As a developer, we have to commit to designs and some pricing at inception stage and work though the planning process. Not having a system of sufficiently early engagement with planners means that it is taking longer to get decisions, resulting in increased risks at planning stage.
Certain fixed elements give us some cost certainty, however, we are definitely seeing significant pricing volatility in the current climate. This is proving challenging at site appraisal/feasibility stage.
This is high on our agenda at Regent Capital and we are exploring investment options in products focussed on sustainable affordable family homes.
Rory Robertson, GM/Director, Portakabin (Scotland)
The benefits of Modern Methods of Construction
Portakabin is one of Europe’s leading providers of modular buildings providing interim or permanent structures for almost any application, ranging from site huts to state of the art operating theatres. Our steel framed modules are manufactured and fully fitted with all electrics, plumbing, heating and internal finishes completed offsite delivering fast, high quality solutions to our customers. This process allows for groundworks and foundations to be completed while modules are being manufactured, significantly improving the speed with which our customer’s projects are completed and our reliability in meeting deadlines. Our modular approach to construction allows greater flexibility for customers with our buildings capable of expanding, relocating and evolving to meet changing requirements for space as well as linking to existing traditional structures. Of growing importance are the benefits offsite construction has in reducing waste compared to traditional construction with factory controlled processes also minimising the amount of energy required to create a building. The benefits of modular construction are best recognised through standardisation and repeatability of design, specification and building footprint. Modular and the development of other MMC approaches have a key role to play in the future of the sector, providing new mechanisms of delivery for our customers outside the facets of traditional construction.
Clients, partners and pipeline
We work across both public and private sectors, delivering projects to clients in education, healthcare, manufacturing, construction and transport. We act as a single point of contact providing full turnkey packages from concept through to delivery or in collaboration with partners, as part of larger schemes. In recent years we have seen a significant shift towards a standardised approach to building configuration across the public sector. The Department for Education have led the way in seeking sustainable and standardised products and processes with other departments beginning to explore how MMC can transform the delivery of public works projects. Whilst specifications and fit out requirements will differ between e.g. education and health, the footprints are often comparable i.e. requiring similar sized modules. Through early engagement, we have the capability to plan and transform our designs to meet the needs of those different clients and the capacity to continue to manufacturer at scale.
It includes a number of key principles which align with our business model. It says that transforming delivery of public works projects to a safer, more innovative, manufacturing-led approach should improve productivity and value for money and should increase the end-to-end speed of construction projects and programmes. At Portakabin we continuously seek to strengthen skills and capabilities, improving our products through innovation, technology and investing in our people. This will help with the sustainability agenda (net zero by 2050) and it enables us to meet client needs and target new markets.
We are engaged by customers through a range of different procurement mechanisms from sole source and direct award to preferred supplier agreements and public procurement frameworks. Portakabin prides itself on our customer service delivering 99.7% of projects on time and on budget since 2003, developing deep rooted partnerships with our clients as their go to providers for all temporary and permanent buildings. Public sector projects are often procured through a framework agreement e.g. NHS Shared Business Services and Scottish Procurement Alliance and their specific Modular Building frameworks.
John Edwards, Director (Head of Costs Management), PMP (Building Surveyors) and past Chair of RICS Scotland
Materials shortages/import delays and volatility on pricing
Possibly a combination of Brexit disruption at ports and COVID-19 impact on global shipping (exports to UK or to our EU based distributors). We have seen a significant lengthening of lead in times on e.g. lifts (up to 20 weeks from order to delivery on projects that had allowed for 16 weeks from order to installation) and EVA charging points made in Far East have gone from lead in times of a matter of days to over a month. We are having to plan projects more carefully now due to the extent of disruption and shortages. Demand is outstripping supply on some products (e.g. timber) to such an extent that manufacturers and suppliers are sometimes holding prices for only 24 hours. It is very difficult for the construction sector to plan for that level of price volatility and to absorb such inflation rates, particularly on projects that have long since been priced and are now in progress.
Movement of labour
As Stuart Parker has said, in Scotland we are seeing a rise in skilled labour migrating from Scotland to south England to work on major infrastructure projects due to perceived longer term stability/job security/improved profit margins and pay. The Scottish government is aware and, hopefully, will stem the outward flow of skilled labour by increased investment in major infrastructure north of the border.
UK subsidy laws
Having left the EU, we can now help to shape how the Government invests in construction sector projects throughout the UK. We need to focus on what our communities need and what we expect of built environment in the future - with a particular emphasis on: outcomes based/whole life value; driving the sustainability agenda; and achieving net zero carbon emissions by 2050. That is the future of construction.
Mike Lane, Operations Director, Willmott Dixon
Response to COVID-19
In the latest lockdown, the health and welfare of our people and communities has remained central. In some areas we have introduced weekly lateral flow testing. We have work bubbles and are extra vigilant in looking after our people and reassuring them that we are doing all we can to keep them safe. However, consistent with the arrival of new variants, between November and January in certain areas we saw increased positive cases and closed a couple of sites temporarily. The availability of testing in some communities e.g. Liverpool has been fantastic. The attitude of people working across our projects in all areas has been great and they have been tested, when appropriate. Positive cases have remained low, all things considered.
Post Brexit market conditions
It may be another 6 months away from understanding the true implications of separation from the EU single market. Liquidity of the supply chain remains a concern so we are fully engaged with stakeholders up and down the chain and we trade on significant goodwill and strong relationships built over many years. Anecdotal evidence indicates that some stakeholders in the sector are testing market viability, so, there is a risk of deflation if the sector sees a surge in the withdrawal of projects in the pipeline. Deflation risk seems low though and, hopefully the sector will see the growth that many are predicting. It is positive that the Government has issued the Playbook and put construction at the heart of the UK economic recovery, and we’ve discussed on the roundtable the role of MMC in the future of construction.
Grenfell Tower and Building Safety
The lessons learned by the sector from the Grenfell Tower fire in 2017 and the extensive regulatory reforms underway, affect each and every building we now look at from a design perspective. It is right that the future of construction involves an overhaul of regulatory regimes on building and fire safety, management of the ‘golden thread’ of building information, and greater responsibility of dutyholders and accountable persons.
Modern Methods of Construction
There is place for it, but, it will not always be the right choice. There is also some push back from the insurance market in terms of e.g. (i) timber framed residential and how it performs in comparison with traditional build residential; and (ii) in light of Grenfell Tower, how MMC components can be developed to satisfy stringent building and fire safety requirements. The other issue we have experienced when procuring MMC components is that suppliers do not want to engage under sub contracts and prefer materials contracts instead – we see that as risk avoidance on their part, which is a challenge when we are trying to build relationships and goodwill with them. It needs to be Government led and the Construction Playbook may be a positive step to pull us all in the same direction.
Chris Lafferty, Construction Director North West, Wainhomes
COVID-19 and the supply chain
We have experienced the materials delays and price increases that others have mentioned. I am aware of one of our suppliers that did recently succumb to increased COVID transmission rates, presumably due to the new variants – this caused some disruption. Out of a workforce of 22 at that particular supplier, all but 2 staff were off work due to positive COVID cases or in isolation in accordance with Public Health England guidance and updates (isolation flowchart) in version 7 of the Construction Leadership’s Council’s site operation procedures issued in January.
Modern Methods of Construction
At Wainhomes we see that MMC has a role to play in our business model and in the future of the construction generally. I started my career as a bricklayer and, therefore, I am a traditionalist at heart, but, I do see a place in the market for both traditional and off-site construction working in parallel. Having not built timber framed homes for 15 years, at Wainhomes we have sustainability at the forefront of our minds and have recently engaged specialist modular contractors to start building 33 modular timber framed homes on a site in the North West region and have another site in the pipeline.
COVID-19 has forced group of our directors with responsibilities for different regions to have regular meetings over Zoom. Historically we would find it difficult to meet in person due to the pre COVID world of head down, on the road and taking charge of separate regions. The virtual world has, therefore, definitely helped us collaborate more and gain a wider perspective on sector issues e.g. progressing the MMC conversation and giving careful consideration to its role in the future of our business.
Mike Horne, Division Management, Capital Projects, Liverpool City Council
UK subsidy laws
It will be helpful once we have clarity from the Government of when the new legislation will be in place, bearing in mind it is still at consultation stage. Reflecting on the old ‘state aid’ rules, the main principles can look fairly straightforward but their legal application (particularly on complex development side investments) can be extremely complex. For now, we are working to old guidance insofar as permitted, until guidance on new rules/legislation is firmly in place.
Sector wide collaboration towards a common goal
Collaboration and partnership is key to sector resilience and success and that is clear from the Construction Playbook. At Liverpool City Council, we have found that best behaviours attract best delivery partners and best outcomes based cost effective whole life solutions (and which going forward should include MMC and sustainability options insofar as possible). To achieve that level of commitment consistently requires a significant sector wide cultural shift, but from where I stand, that is the future of construction and with true collaboration it is achievable.
Peter McDermott, Professor of Construction Management and Procurement in the School of The Built Environment at Salford University
Future of Construction
COVID-19 lead to a UK economy in recession for the first time since 2008 and the Q2 fall saw the biggest three-month decline since comparable records began in 1955 (Building Magazine 2020). Pre-pandemic construction output in the UK was worth around £110 billion per annum i.e. around 6 to 7% of GDP (and this measure does not include professional services and manufacturing, but, it dropped to 4.6% in Q4 according to an ONS report in February 2021. Perhaps, we should not be surprised therefore that the construction sector is now in the focus of policy makers and politicians alike. Again, using pre-pandemic figures, the construction sector is four times the size of the aerospace and automotive industries. Late 2020 and early 2021 have seen a series of policy initiatives that seem to promise the potential for progressive development of the construction sector.
Construction Playbook/Review of frameworks
The Playbook has set out the rules that show how the government should assess, procure and deliver public works projects and programmes which all central government departments and their arms-length bodies are expected to follow on a ‘comply or explain’ basis. E.g. a local authority that is inclined to pursue a traditional, first past the post, lowest price tender will need to explain why. In addition, since the publication of the Playbook, the Government has honoured a promise therein to launch an independent review of public sector frameworks, with a view to establishing a “gold standard”. Some of the plethora of frameworks that have been launched over the last ten years may come under scrutiny. In 2011 the findings of a report on the effectiveness of frameworks were accepted, except the one asking for some kind of quality standard; this seems to have come around again. Here you can read the news story 'Launching the Independent Review of Construction Frameworks'.
In parallel with the work leading to the launch of the Playbook, a Value Toolkit is also under development. It is expected to be rolled out in Autumn 2021. The Value Toolkit will offer the opportunity for various aspects to be taken into consideration and built in to project programmes at inception - including (i) value-based decision making; (ii) zero carbon; (iii) levelling-up; and (iv) social value.
December 2020 saw the Government publish not only the Playbook but also the Green Paper on Transforming Public Procurement which proposes significant changes to the buying and supplying processes within the public sector. European Procurement regulations were frequently seen as a bar to progressive procurement but the Green Paper offers the prospect of UK procurement being as sympathetic to social value as indicated in recent Public Procurement Notices.
I would encourage those investing in public works projects to read the green paper here. There is an opportunity to have your say by responding to the Government consultation by 10 March 2021.
Key take away messages
Time for changeThe construction sector has faced unprecedented financial and operational challenges due to the cumulative effect of Brexit, COVID-19 and the economic downturn. A cultural shift towards (a) sector wide true collaboration (i.e. early engagement of stakeholders, looking after the fragile supply chain and, and fairer cost/risk allocation); and (b) embracing delivery through innovation and MMC/manufacturing led approach, will give the construction sector the best chance of building back better, faster and greener.
MMC and PlaybookTo achieve a system that repeatedly delivers on quality, capital, scale and sustainability, there needs to be a range of MMC products and specifications/standardisations, workable procurement routes and risk allocation. Such a system should generate confidence in consumers, lenders, funders and insurers. The Government is committed to the challenge - £37 billion of public sector contracts across economic and social infrastructure will be brought to market in 2021 and a key focus is continuous improvement and innovation through MMC and digital technologies (view the construction playbook for more information). Homes England is committed too with its Affordable Homes Programme (‘21/’26) requiring strategic partners to build 25% of pipeline utilising MMC – bidding opens in March 2021 (for 6 weeks only). You can view the guidance here. For more positive drivers for MMC (specifically modular) see the Glenigan Article: ‘Sector – Paving the way for modular construction’ available on glenigan.com (subscription required).
Access to funding though UK subsidy lawsWe know that there is an opportunity for the construction sector to really shape the subsidy laws in order to make effective use of public money where it is needed most. From infrastructure to development gap funding through to support mechanisms for cash flow during a crisis such as COVID-19. In theory, Brexit should permit government to concentrate further on their regional fiscal policy through the levelling up agenda – creating local opportunity and growth which is specific to the regions. We are all encouraged to have a voice in how this will work, by either responding to the Government subsidy control consultation (view consultation here) or by contacting the CBI with views on the challenges facing the construction sector due to Brexit and COVID-19 (Contact CBI).
Labour/Immigration concernsThe general consensus at the roundtable event was that there has been no real impact of Brexit, COVID-19 and the new immigration points based system on construction sector workforce/labour at present. Some impact is inevitable given that, historically, the UK construction sector has comprised circa 10-14% of migrant workers, although, this has declined over the last two years as the sector has prepared for the post Brexit world and a new points based system in any event. What is clear is that there is an inherent, grass roots skills shortage for the Government to address and the sector to manage, which would involve (i) looking at skilled workforce – how best to attract workers; (ii) apprenticeships and other schemes; and (iii) funding to assist filling the skilled workforce gap. Separately, there is a need to consider and re-think the general operation labour model in the sector due to upcoming challenges - with Gig economy, recent Uber decision and IR35, the self-employed framework of the construction sector will be impacted and perhaps disbanded if no longer fit for purpose. Direct employment may rise, resulting in increased labour costs for those that have historically relied more heavily on the self-employed.
Roadmap to net zero by 2050It was clear from the views of the key leaders on the roundtable that the view is climate change and net zero will be the next big challenge and the construction sector is looking to put out a marker that they are aware of this and engaged with it. The Construction Playbook is a welcome element and a good start. The statistics show that the Built Environment makes up for around 45% of Co2 omissions in the UK – that is existing building stock, new stock and all associated types of development like infrastructure. So the sector will have to embrace the changes required to get closer to net zero carbon. This will bring challenge and opportunity and some of the solutions that the sector is having to implement to deal with COVID-19 and Brexit may help it to get on to this road. At Weightmans, we have our own net zero carbon plan and we are always happy to discuss with clients and contacts the stage they are at with their net zero carbon plans and sustainability agendas.
Weightmans LLP is a full service firm. We have advised many construction clients in relation to the business impact of the issues discussed at this roundtable event and we have provided bespoke solutions to meet our clients’ needs. If assistance is required, we are ready to help you.
Banking & Finance
Employment and Immigration
The key leaders shared the view that Modern Methods of Construction has a key role to play in the future of construction. A transition to a ‘manufacture and assembly’ approach will reduce the demand on traditional trades and should lead to time and cost efficiencies and improved quality.
The Government, customers and Tier 1 contractors can drive this step change by signalling an intent that gives the supply chain confidence to invest in these methods of working. Greater support to protect the fragile supply chain and more investment in apprenticeships schemes and skills training across the UK are also key factors for construction sector resilience.