Reaching for recession resilience - the route from retrenchment to recovery
However long or severe the softening of the market is, it will present a new and complex set of challenges for those leading capital investment programmes.
Optimists point out that economic contraction may finally break the inflationary cycle that has dogged the construction industry ever since the post-pandemic surge in demand began two years ago. But even this prospect may amount to a fleeting tonic.
While our tender price inflation forecast for 2023 is less than half the levels seen in 2022, slowing demand has so far done little to cool input costs. Turner & Townsend’s latest sentiment survey found that contractors still expect labour, plant and material costs to rise by 9.0 percent over the next 12 months.
The chronic shortage of skilled labour, coupled with stubbornly high materials costs, means inflation will remain a clear and present danger in the short term. During 2023 contractor insolvency – and with it, the risk of project disruption – is likely to rise, and in the long-term productivity and innovation could fall.
No one behaviour can neutralise the adverse effects of a downturn. But construction is a famously volatile industry that has seen more than its fair share of rapid contractions and expansions, and this experience has taught its seasoned professionals a series of techniques that can be used to make programmes more resilient to market shocks.
Below we outline the tools and tactics that can be combined into an effective strategy for resilience, over the immediate, medium and long-term.
Begin with brilliant basics (immediate term)
High input cost inflation remains the most pressing challenge for programmes in both the procurement and construction phases. While the dual threat of market softening and rising interest rates adds an additional layer of complexity, the road to project resilience still begins with controlling costs and risk. Now, more than ever, getting the basics right and implementing structured due diligence is critical. Start by focusing on the following three key areas:
Take the time to tender properly: Months of rapidly rising prices gave the impression of a ‘pressure cooker’ in 2022, in which tender timeframes were often compressed from the traditional 90 days to a few weeks. As a result, some clients were tempted to rush the review and signing of contracts in the hope of locking in a favourable price.
Panic plus procurement never adds up, especially in the current uncertain environment. Procurement teams should take the time to eliminate any ambiguity prior to agreement, ‘road-testing’ contracts for all eventualities, building in systematic assurance mechanisms and regular performance audits.
Procurement leaders should also consider the capabilities the supply chain will need over the coming years and build capability resilience into their partnering ecosystem. Coordination needs to be strong right from the start, and clients should select a design team able to produce an integrated, BIM-enabled plan to give bidding contractors a precise, clear scope of work during the tender process. Coordinating design early on will also help ensure the best-qualified contractors are appointed and eliminate design clashes down the line.
Apportion project risk pragmatically: Client anxiety over cost volatility can make fixed price contracts – which transfer significant risk to the supply chain – seem attractive. However, asking suppliers to bear excessive risk can trigger other, less obvious risks; those who bid low on such ‘unfavourable’ contracts are more likely to be at higher risk of insolvency, and such bids will be risk-adjusted – i.e. more expensive – and may therefore represent poor value for the client.
A more balanced approach might be for suppliers – who are more closely connected to logistics chains – to shoulder the delay risk, with the client factoring higher levels of cost contingency into its cost planning.
Cyber threats and systemic resilience to them must both be managed carefully, with special attention paid to the weakest and least visible parts of a complex supply chain – as they may be exposed to the greatest risk. As the threats multiply and our adversaries become increasingly prolific, potent and sophisticated in their methods, so should the client’s approach, partners and procurement strategy reflect this evolution.
Keep the supply chain map updated: Sanctions on Russia and lockdown restrictions in China have disrupted the global supply of both raw materials and construction components, but the pinch points continue to shift. Clients need to be kept updated throughout the construction phase on which parts of the critical path will be most impacted in the coming months, and procurement teams should engage with alternative suppliers early on, testing their resilience upfront and confirming their ability to deliver consistently.
Embed efficiency (medium-term)
Different construction sectors are dealing with challenges differently. Rising interest rates and falling consumer demand have prompted some private sector real estate clients to rethink their investment decisions, while public infrastructure programmes are under pressure to do more with less, even if their funding is guaranteed. But if there’s one strand that links them all, it’s that greater efficiency delivers greater resilience. The following routes to efficiency are tried and tested:
Place data at the core: Establish strong digital principles right at the outset of the project. Data should be recognised as an asset in its own right, to be shared securely across programme teams and suppliers, ideally driven by a digital project management office (PMO). This is a PMO enhanced by digital tools such as powerful analytics and software robots, which enable the most efficient collection and presentation of data, gathered in real-time and available instantly.
At the programme level, the creation of a programme data strategy and a common data environment will enable all parties to access insights and share evidence-based best practice across projects. At site level, construction teams can use augmented reality to rehearse tasks digitally – learning exactly how to install individual elements before doing so for real, thereby eliminating errors and omissions and boosting safety.
Spend to save: Modern methods of construction (MMC) use modular components manufactured off-site that cost more initially than conventional building materials but deliver significant savings over time.
Factory-made modular components can be assembled to a uniformly high standard and require fewer people working less time on-site to assemble them. The key to using off-site production efficiently is to get the manufacturer involved early and collaborating well with on-site contractors. Value and resilience gains will quickly be lost if on-site progress gets out of step with the production, or delivery, of modular units.
Embracing MMC: The transformational power of MMC technologies can be blunted by imperfect standardisation. Manufacturers who are given insufficiently precise specifications are likely to supply different design solutions, so programmes wanting to use multiple suppliers should decide on an exactly defined, standard design by the end of the briefing process.
In part, this requires clients to embrace a cultural shift to make detailed design decisions earlier. Over time they and their programme team should establish a standardised digital components library, collaboratively curated by designers, contractors, manufacturers and supply chain partners.
Seize the opportunity to reset (2024 and beyond)
With tendering conditions set to cool during 2023, our latest forecast anticipates that real estate tender price inflation could ease to just 2.5 percent in 2024. While it’s still unclear how long the reduction in activity might last, the need for greater industry resilience won’t end with either the easing of inflation or the return to growth. For the recovery to endure, the industry should use the coming year to boost resilience for the future too. Three long-term issues all require attention:
Be alert to insolvency risk: Downturns can push up company failures over time, but the construction industry’s elevated level of insolvencies predates the current contraction. 3,949 construction firms went bust in England and Wales during the 12 months to the end of Q3 2022 – by far the highest number of insolvencies of any industry – and the toll is likely to climb higher during 2023.
Managing the risk of contractor insolvency, therefore, remains critical for programme managers. Procurement teams should give equal weight to a bidding contractor’s financial stability as to their past project expertise, considering the contractor’s current workload and whether its business is disproportionately leveraged on one client or project. For programmes that are already in flight, pre-emption is always better than cure; project controls should serve as both an early warning – and correction – system, and clients need to be alert to any signs of contractor distress while also supporting their supply chain.
Activate automation and drive digital-first: Technology alone will not deliver permanent productivity gains, but it will be a key enabler. From more effective use of MMC, in which programmes drive better standardisation through framework agreements, to increased automation – featuring driverless plant and software robots – clients who use technology well will enable hundreds of tasks to be completed more quickly, more accurately and more safely, thereby boosting efficiency, repeatability and resilience.
Decision-makers should take a digital-first approach that combines agility with robust standards, to track performance levels and target the measures of success that matter to the programme. This may be in terms of cost, timescales or productivity; for example, at Heathrow Airport, improved digital performance, reporting and controls provided faster, more accurate and more insightful metrics.
Look beyond cost to deliver the greatest value: Alternative procurement and contracts should be explored, with the goal being to apportion risk more equitably and pragmatically, and incentivise suppliers to maximise value rather than just hit target costs.
Ultimately, it’s by achieving a wider definition of value – social and environmental value – that the construction industry will become more resilient to its perennial recruitment problems. Forward-thinking clients should broaden their definition of what success looks like, with a focus on outcomes such as net zero or skills-building targets. Turner & Townsend has long championed this approach, working on the refresh of the Infrastructure Project Authority’s Project Routemap and in partnership with the CBI on the report Programmes with Purpose. This puts communities, value-for-money, and the climate at the heart of the way programme success is judged because a construction industry that delivers societal as well as economic benefit is more likely to be both an engine and a beneficiary of the recovery.
From recession to recovery
Many construction industry veterans are now facing their fourth major downturn in little more than a decade. Those who have been here before will need to call on their reserves of experience, fortitude and pragmatism to steady the ship during what may prove a longer slowdown than the short, sharp shock of the pandemic.
In the short-term, project teams must not drop their guard against inflation. Procuring intelligently, mapping supply chains carefully and apportioning risk sensibly should all be priorities. Over the coming months, project managers must also be mindful of the spectre of contractor insolvency and make better use of MMC and digitalisation to improve efficiency and value.
Boosting efficiency is one of the quickest and most effective ways to withstand market volatility and chart a course to calmer waters ahead.
However UK construction has wrestled with poor productivity for decades, so the task will not be plain sailing and demands a different approach that prioritises new skills, innovative capabilities and a renewed focus on real collaboration and partnering.
But by combining robust project controls with digital-first ways of working and the speed and consistency of modular technology, the industry can make enduring efficiency gains. And a more efficient industry will be more resilient during the recession and recover more quickly after it.
© 2023 Turner & Townsend