Taking the temperature in the UK and Germany. Our Project Management team’s perspective on how to meet the current challenges.
With regular reports coming out of the UK and Germany in 2023 indicating significant distress in the construction sector in these jurisdictions, we look at the level of distress, the root causes, the potential outlook for the next 1-2 years in an Irish context and most importantly what can the Irish Capital Development and Construction Sector do to meet these challenges today.
On 25th September, Reuters reported that the German government had announced a €45 billion relief package for its troubled construction sector, with €18 billion coming from the federal purse and the balance from individual German states and municipalities. A raft of proposed building regulations was put on hold, including improvements to insulation standards. High costs and interest rates are said to be contributing to the issues that have recently beset the industry. In Q2 of 2023, German house prices fell by the most since records began, with the end of low-interest loans impacting on deals and tipping many developers into insolvency. The property sector in Germany must now rely on the strength of the German public purse to weather the storm.
The UK is beset by the same issues as their German counterparts, but seemingly at a more pronounced level on the back of supply chain disruptions and other issues stemming from the UK’s departure from the European single market. Figures released in August by the UK Insolvency Service show that an eye-watering 4,280 construction-related businesses became insolvent in the year to 30 June 2023. There is little sign of any relief either, with the latest quarterly market forecast from Arcadis, released on 4 September, describing ‘concrete signs of a construction slowdown that is set to rock the sector, with new orders falling for the third consecutive quarter even as viability and dwindling demand levels hit housebuilding’. Reports note the quantum of insolvencies is on par with the 2008/09 financial crisis. There is concern about the number of insolvencies from well-established firms, which tends to give rise to the ripple effect of bad debt working its way through the sector.
Many of the factors contributing to the current difficulties in the UK and Germany are not new. Labour shortages, environmental regulations to tackle climate change and supply chain challenges have been a fact of life for many years. Stable inflation and low interest rates served to paint over these cracks. With high inflation and interest rates set to be with us for the foreseeable months and years, the construction sector in these jurisdictions appears set for a sustained period of challenge and risk.
To date, the Irish construction sector appears to have been more resilient than its counterparts in Germany and the UK. However, the issues outlined above are as much a reality in Ireland as elsewhere, and the Irish construction sector’s resilience is being subjected to significant challenges and risks. Are Germany and the UK merely offering a glimpse of what lies ahead for Ireland?
Government and Sectoral Level responses to economic challenges tend to make an impact in the long run more so than in the here and now. There are some exceptions, for example, the welcome updates to Public Works Contracts cost inflation provisions. Generally, sectoral level changes take time: ongoing expansion of the supply chain beyond the traditional UK land bridge into France and the other EU states; bringing new apprenticeship programmes online and ensuring construction jobs can compete with the multi-national sectors, public sector, and other indigenous sectors of the economy; embracing new technologies and new methods of construction. These measures go hand in hand with attracting new people into the sector and with constructing high-quality sustainable buildings in the long run. These changes are needed and will come in time, but what about the here and now?
As Project Managers, we’re accustomed to producing risk registers and identifying mitigations against various risks. So, what can clients, contracting authorities, building contractors, and project managers do to mitigate against the current and ongoing risks within the sector?
Looking at the current challenges at a project level, there are ways and means to mitigate and manage the issues we currently face. Like the challenges, the means of meeting them are not new. It is simply more critical now that these strategies and measures are implemented fully and professionally. Getting on top of the project brief, understanding the detail, aligning budgets and costs, reviewing contingency provision to ensure it is realistic, identifying and eliminating programme delays at every stage, risk management, and value management. There’s nothing new here, but when things get tough, there’s a lot to be said for doing the basics, and the tried and tested right.
It’s a fact of life in the current climate that contractors are seeking to recover every cent when changes arise during construction. In a high-inflation environment, costs arising from changes can escalate quickly. Appointing the right design team, with the right experience and demonstrated ability and willingness to truly understand the client brief and to work together to turn around fully considered and collated design packs on time remains the best way to mitigate against design changes post appointment of the contractor and a plethora of other projects risks. There is simply no substitute for experience, ability, and the right motivation in a project team.
Similar to appointing the design team, when appointing the building contractor, significant consideration and work are needed to establish a process to identify the best contractor for the job. The quality aspect of any bidding process is essential and provides the context for pricing. For example, identifying contractors who have fully implemented and used the latest IT-based systems for controlling Request For Information (RFIs), managing and tracking the Building Control (Amendment) Regulations (BCaR) process and compiling the safety file has significant benefits at the construction stage. Ultimately, the right contractor is the one who truly considered the specific challenges and nature of a project and takes the time to demonstrate their ability and willingness to meet these challenges when bidding.
The Irish exchequer arguably never held as good a position in a global downturn, and our shared experience in collectively negotiating difficult times should stand us in good favour. Like the German exchequer, the Irish purse is in relatively good health and positioned to support ongoing capital development in the years ahead. The construction industry also has at its disposal some of the brightest and best talent this country has to offer, and getting the right team for the job still offers the best mitigation against the various risks we collectively face.