The evidence reviewed indicates that the construction industry and its labour model is at a critical crossroads in terms of its long-term health. Whilst the diagnosis points to a deep-seated market failure, there are certain industry trends and wider societal changes happening now that represent both unprecedented risk and opportunity for the industry and its clients. If the opportunities are not harnessed, the risks may become overwhelming.
The prognosis for the industry, if action is not taken quickly, is that it will become seriously debilitated. It is facing challenges that have not been seen before, which create an absolute imperative for change. Previous calls to arms have not been acted on by the industry or its clients at any real scale and somehow the industry has continued to 'muddle through'.
It is unlikely, based on past evidence and the pressure of delivering their own business requirements, that clients will simply stop using the industry until it improves its proposition. However, recent capacity-led construction cost inflation experienced in some parts of the industry has certainly undermined project viability, especially in the residential sector where the issues are most acute. This has led to projects stopping as they have become unaffordable or in some instances physically undeliverable as good quality production capacity is not available. Possible future demand weakening may now support a complacent view that a natural realignment of supply and demand is taking place that will allow the construction sector to 'sort itself out'. History suggests this will not happen and we need to look beyond any short-term correction if we want to break out of a continuing boom and bust cycle of overheating followed by permanently damaging attrition in a downturn.
The real ticking 'time bomb' is that of the industry's workforce size and demographic. Based purely on existing workforce age and current levels of new entrant attraction, we could see a 20-25% decline in the available labour force within a decade. This scenario has never been faced by UK construction before and would be a capacity shrinkage that would render the industry incapable of delivering the levels of GDP historically seen. Just as importantly, it would undermine the UK's ability to deliver critical social and physical infrastructure, homes and built assets required by other industries to perform their core functions.
Prior to the vote for Brexit, some might have seen migrant labour as a solution to the shrinking workforce. Without entering the wider political debate, it is recognised that migrant labour has historically played a key role in providing capacity in UK construction, especially in London and the South East. A report by the National Institute of Economic and Social Research1 suggests that over half the workforce in London comprises migrant labour, whereas the rest of the UK shows no over representation of migrants in the construction sector.
However, increasing substitution of a reducing domestic workforce by migrant labour comes with substantial risks. Furthermore, it is now uncertain how the UK's vote to leave the EU might affect the availability of migrant labour moving forwards.
Where overseas developers and contractors have entered the UK market, the early signs suggest that their model is not going to assist long-term capacity building. Models adopted so far have relied on joint ventures to allow cross-fertilisation of knowledge at senior management and supervision level. This has not extended down to the supply chain labour force. A significant increase in the labour force from foreign corporate entrants is therefore not likely to be possible without an acceptance of much more radical 'outsourcing' with all the political and economic difficulties that brings.
The current pace and nature of technological change and innovation in wider society is such that unless the industry embraces this trend at scale, it will miss the greatest single opportunity to improve productivity and offset workforce shrinkage. Failing to embrace change will also further marginalise the industry by reducing its attractiveness to a new generation of workers who will have grown up in a digital world. This review suggests there is a tipping point that is likely to be reached in the next 10 years where industry will see all of the failure symptoms highlighted in this review getting worse to the point where decline possibly becomes irreversible.
There are some early signs of manufacturing-led foreign corporates considering entering the UK market and overcoming traditional barriers to market entry through use of pre-manufactured construction products as opposed to traditional construction methods. New foreign entrants in this field, if meeting technical and quality standards, would potentially be a much needed boost to UK housing supply capacity. But reliance on foreign entrants would represent a lost opportunity for the UK to retain value added, including direct and indirect employment, IP development and to potentially build an export base.
A final issue that could define the future outlook for the residential construction sector, is its apparent growing reliance on the 'for sale' housing model, with which it has never been more deeply synchronised. As the social housing sector has changed its model to private sale led cross subsidy and surplus generation in response to a series of policy changes, there is now less opportunity, in the event of a private market correction, to create a 'soft landing' through a social housing build programme. This is a real risk to housing delivery in the UK due to the potential for even greater cyclicality than seen previously.
Government has a strategic choice to make about the future role of grant funded social housing, which has historically been used as a counter-cyclical demand tool. This also brings into question the role that may be played by direct delivery measures across all tenures either at a central, regional or local government level.
There is also a significant opportunity presented by the Build to Rent sector to create acyclical and at scale demand that could underpin significant investment in innovative ways of building and the development of new skills across the industry.
More tenure diversity would immediately imply different supply chain and delivery models that may better promote innovation. In time, this may in turn influence core housebuilder delivery models but it is considered unlikely that large scale innovation will start in the volume housebuilder market.
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1 Heather Rolfe and Nathan Hudson-Sharp, The impact of free movement in the labour market: case studies of hospitality, food processing and construction. National Institute of Economic and Social Research (NIESR), 27 April 2016.