What keeps construction customers awake at night?

Since the economic downturn in 2008, the construction sector has experienced a bumpy recovery, with several large firms issuing profit warnings to investors this year. While the industry as a whole shows promising growth – in terms of new project orders – it could take some time before this filters down to businesses’ bottom lines.

Zurich recently conducted research with 200 mid-size construction firms (turnover between £5m and £300m) about the key challenges facing them, and what they are doing to address them. This research aims to provide brokers and their customers with the latest views on the risks facing their industry and what could be done to mitigate them.

Lack of skilled labour

In February, Zurich reported that the construction industry might be on the brink of a skills crisis. The latest research validates this, with more than half (53%) of respondents viewing skill shortages as the number one challenge facing the industry, and 52% believing the situation will get significantly more challenging in the next five years.

Of those surveyed, 77% believe that skill shortages on site are causing difficulties in managing projects. While there are skill shortages across all trade types, our survey showed that bricklayers and carpenters/joiners were thought to be most affected.

To ensure they always have the right workforce for the job, almost half of participants plan to increase the number of directly employed site staff and site managers, and around 40% intend to recruit more apprentices and other trainees.

While better recruitment and training will help address future labour needs, in the short term businesses may need to employ lesser-skilled or migrant workers to meet project demands. The competency of an under-skilled workforce, and potential language barriers with foreign employees, can bring particular risks regarding health and safety and liability issues. Customers should ensure extra training and supervision is undertaken to mitigate these risks.

Availability of materials

A lack of materials, particularly bricks, is causing headaches for many firms. In the past five years, an initial dip in the construction sector led to a drop in demand for materials, resulting in materials manufacturers slowing or halting production. As the sector recovers, supply is following suit, but is yet to catch up with rising demand.

A shortage of available materials is seen as a challenge in managing projects for 43% of those surveyed. This increased to 74% when looking at housebuilders in isolation, possibly due to their heavy reliance on basic materials from limited sources to deliver on contracts, and it has exposed supply chain instabilities for some.

Many are attempting to address this challenge by increasing the number of suppliers they use, and improving the strength of their supplier relationships. 10% of those surveyed say they have needed to source materials from abroad (which brings with it additional supply chain risk and complexity), while others are turning to modern materials to ease their reliance on those in short supply.

A significant number (39%) are responding to this challenge by buying materials in advance and keeping a larger amount in stock, which, if managed effectively, can go a long way to smoothing out any volatility in supply. Brokers and customers, however, need to ensure that insurance arrangements are reviewed to take into account any increases in materials stock, including considerations regarding appropriate storage and security.

Rising costs

For 18% of those surveyed, rising costs was cited as the greatest challenge in today’s market, with 75% saying this was making it difficult to manage projects (increasing to 91% when looking at housebuilders in isolation).

Many of those surveyed said they had strategies in place to address this challenge. Incorporating forecasted cost increases into tender bids was a particularly popular strategy, with 24% of survey participants discussing this. Buying materials from more than one supplier and ‘shopping around’ was another key strategy, with 17% of those surveyed taking this approach.

Excess demand for both labour and materials is naturally causing cost inflation. With contract prices under a lot of pressure, rising costs can pose a significant threat to profitability if not properly addressed. While many firms may be tempted to cut costs by using cheaper materials or employing lesser-skilled labour, the risk implications need to be fully considered, as they could cause further problems down the line.

Differences in concerns

All groups surveyed mentioned skills shortages as their primary concern. However, there were differences among other worries:

  • Main contractors are more concerned with the lack of skilled labour and less concerned with cashflow.
  • Civil contractors are more concerned with cashflow and securing work.
  • Sub-contractors are more concerned about cashflow/getting paid.
  • Housebuilders are much less concerned about profit margins, indicating that these are healthy for almost all, but their greatest challenges are availability of materials, funding, planning issues and availability of land.