State of the Sector
This round table discussion between leaders from within the sector addressedd the current challenges the sector faces and its implications on business priorities. The event was organised by the Chamber, sponsored by Spitfire Analytics Ltd and hosted by Richard Higginbotham of OPTSM
The key themes were:
Growth but the outlook is uncertain
According to ONS figures the sector is above preCovid levels and expected to grow at around 2%. The residential sector has been the powerhouse of this growth with the commercial focus being around refurbishment and refit rather than new build
Inflation
There is clear consensus that inflation is the biggest challenge for the sector. Double digit rates are impacting for example land price and labour rate inflation. The impact on raw materials was starkly highlighted by steel prices being held for only 3 hours. The view that ‘inflation is not abating anytime soon” was widely accepted.
The impact is compounded as pricing agreements are ended and the pressures on margin are ever more acute. Andrew Turner notes that there is “no margin for error” when pricing for work and there is consensus that firms are lucky if they are working on a 1% profit margin.
The inflation rate is changing in attitudes. According to Matthew Hollaway “Risk share is becoming more accepted in the commercial sector”. This was as a result of “more open and constructive relationships” and was leading to some cases of index linked pricing. The public sector, it was noted, has been slower to respond.
Supply Chain Disruption
The acute raw materials shortages that dominated immediately after Covid have abated but generally demand is ahead of supply. Securing reliable supply was highlighted as a critical factor in successful project delivery.
Supply of labour and its cost inflation is driven both by skills shortages and inflation in the wider economy. Access to labour from the EU was a contributor and it was noted that “construction is the original gig economy” and “it's now been overtaken by other sectors” who are offering more attractive options. The need for construction labour to be on site was highlighted as a factor that makes it less attractive to some than other working arrangements.
Skills shortages are resulting in pressure to promote young people more quickly than has previously been the case. This leads some to be concerned that the quality of decision making will be eroded, particularly where they are not supported by more experienced colleagues.
The need to attract more people and ensure the industry retains them was agreed by all. To do this requires the industry to sell itself as an attractive option compared to other skills hungry sectors.
Client side pressures
The consequence of inflation on development projects is starting to see “a new literacy developing”. A ‘take it or leave it’ attitude is increasingly being replaced by a more collaborative approach to getting projects started and completed.
The competence and experience of client side QS teams was highlighted as an issue. It was felt that projects are conceived with unrealistic cost expectations baked in. These are being increasingly exposed and resolutions more difficult to achieve in the current environment.
Participants Reactions to the State of the Sector
The most striking reaction is the increased focus on planning. Everyone shared their experiences about how planning has gone from a quarterly task to one run on weekly or even a daily basis. Tom Kirk noted that “people have started forecasting a lot better”
The granularity needed to plan effectively was also discussed. With inflation rates on different items being so significant and variable, taking an averaged approach risks inaccuracy. Working at item level overcomes this but increases the complexity of the process significantly. Indeed, Jade Irwin commented that there are “too many spreadsheets”
Matthew Hollaway made two comments that perhaps best summarise the consensus “the quality of the inputs (to the forecast) must get better” and “finance has to be everyone's job”
Real World Experience from Robertson Construction Shared
The invited guest was Phil Talbot who, until recently, was the Finance Director at Robertson Construction. Between 2011 and 2019 Phil oversaw a period of significant growth (540% to £600M) and Phil shared some of the decisions which supported this success.
At the start of the journey Phil recognised that accurate and timely management information (MI) was a critical success factor and that the current Excel based process was a threat. An objective analysis of what would be needed to support rapid growth confirmed this threat and Phil shared this analysis with the group.
Implementing a fit for purpose planning tool transformed the collection, analysis and reporting of forward looking planning information, enabling significant increases in the sources, volumes and frequency of collection and the sophistication of its analysis. Reporting was transformed into a real time, hands on activity that was pushed back to the business units. The leadership teams were able to:
● Drill down to individual transactions
● Roll up, for example moving individual projects between business units to assess the impact of such a move
● Slice information by time or contract
● Pivot in the same way but much faster than Excel
In addition to getting more reliable, better quality information more quickly, the change away from Excel based planning increased financial staff capacity by around 20% which, Phil noted, was particularly relevant given the current skills shortage.