Construction output
Construction output fell by 0.1 percent in Q2. The quarterly fall came solely from a decline in new work (0.5 percent fall), with support again coming from repair and maintenance (R&M), which grew by 0.4 percent.
By sector, the largest contributor was non-housing repair and maintenance, which grew by 3.0 percent annually, driven by highways maintenance. However, total housing R&M fell by 2.2 percent in Q2 after strong growth in the previous two quarters. Other positive contributors were other public new work, private commercial and industrial new work.
Public new housing fell 8.2 percent during the quarter, while real estate and private housing also struggled. Housing has struggled for the past two years given high mortgage rates.
On the year, output fell by 1.0 percent with the largest declines coming in infrastructure (10.6 percent), private new housing (8.4 percent), industrial (7.2 percent) and public new housing (6.8 percent). Annual R&M data held up well, particularly non-housing, which grew by 7.3 percent and private housing, which was up by 6.8 percent. Outside R&M, the private commercial sector was the only other growth area, mainly driven by fit-outs, data centres and life sciences.
In the first half of the year, there was a decline in new projects and getting projects on-site, mainly due to pauses in the public sector and Government investment in the run-up to the UK’s July 2024 General Election.
Source: Office for National Statistics
Construction new orders
Following the upwardly revised 17.7 percent quarter-on-quarter rise in new orders, there was a further gain of 16.5 percent in Q2. Compared to Q2 2023, new orders have grown by 28 percent, one of the largest annual upswings since Q2 2013 and putting the total value of orders at a two-year high.
Private commercial new orders grew by 15.1 percent, boosted by demand for offices and retail. Infrastructure new orders were another significant contributor to growth, increasing by 23.5 percent. This expansion was swelled by strong growth in the water and sewerage, electricity, public infrastructure and roads subsectors.
Following the 6.1 percent quarterly rise in Q1, private housing new orders grew by a further 11.5 percent in Q2 and saw an annual improvement of 4.3 percent.
These figures align with the Standard & Poor’s surveys and the Royal Institution of Chartered Surveyors’ (RICS) Construction Monitor, which reports stable construction workloads over the quarter, with expectations pointing to a more positive trend on the horizon across all sectors.
Source: Office for National Statistics
From business case to boots on the ground
Despite these signs of improving sentiment and the rapid growth in new orders seen in the first half of 2024, some challenges could lie ahead.
In real estate, for example, even though some commercial activity is picking up, such as in London, some private sector organisations seeking to kickstart a capital programme may come up against a lack of capacity in the supply chain.
Last year’s dip in commercial real estate demand led many tier-one contractors and the supply chain to pivot away from the sector, to focus instead on the comparatively higher demand for technology, infrastructure or public sector work.
Those who made this switch will now need time to recalibrate to take on real estate programmes again. Meanwhile, many of those who continued to focus on commercial real estate have become more selective, preferring to work with clients they already know.
As a result, the private sector real estate market now finds itself in the counterintuitive position of emerging from a lean period with a reduced number of increasingly selective, risk-averse tier-one suppliers.
Meanwhile, in infrastructure, issues may arise from funding rather than sourcing contractors. In July 2024, the new Chancellor Rachel Reeves announced a review of nearly £800m of transport projects backed by the previous Government.
Further details are expected in the October Budget, but the Government’s desire to protect public finances while also leveraging infrastructure’s power to deliver broader economic growth and job creation could lead it to look beyond the public purse to private finance, as per the Euston Station leg of HS2.
In July Ofwat gave provisional approval to an £88bn package of capital spending by water companies across England and Wales. The five-year programme, which is due to begin in April 2025, would see the construction of nine new reservoirs, the first to be built in three decades.
Making infrastructure investable
Private sector investment will be a key part of the infrastructure funding mix over the next decade. But potential investors tend to be wary of the long timescales on returns, tight regulation and uncertainty around planning consent. Public bodies seeking private sector funding partners therefore need to:
1.
Start the dialogue early and invite private partners to help shape the project to ensure incentives align.
2.
Demonstrate predictable returns, with full clarity on the financial model for both capital and operational spending.
3.
Provide transparency on risk, bridging risk gaps with a public sector guarantee where practical, and by showing how the programme will be set up for success with robust controls and inbuilt risk management.
Power up pre-procurement
Capacity constraints and heightened selectiveness among tier one contractors mean tendering successfully in the current market requires greater time and sensitivity than usual, so early engagement with prospective suppliers is vital. Procurement teams should:
1.
Warm up the market by speaking to qualified contractors well in advance of the formal tendering process, and, where appropriate, investing to create the market itself.
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Reassure potential bidders by demonstrating the clarity of the project’s schedule and the completeness of the design; and by providing clarity on the balance of risk the chosen suppliers will need to take on.
3.
Pre-empt contractor questions on payment practices by avoiding unreasonable payment terms and championing collaborative, digital-first working practices.
Develop the commercial and delivery models simultaneously
Traditional commercial models, such as a web of contracts with individual suppliers, have too often been created as a bolt-on to a programme’s chosen delivery model. This approach needs a rethink, and commercial models should instead be integrated with the delivery model as it is designed. Priorities for this process should be:
1.
Correct apportioning of risk and reward between the organisation, its partners and the wider supply chain to maximise value and support sustainable, longer-term relationships.
2.
Creating a mechanism to drive intended behaviours and reward value beyond narrow time and cost metrics, focusing instead on the achievement of agreed strategic outcomes.
3.
Using the commercial model to drive both delivery and programme purpose. For example, the Lower Thames Crossing project prioritises carbon reduction alongside its cost and schedule objectives and has successfully incentivised its delivery partners to achieve a 40 percent reduction in carbon.
