UK: The Farmer Review – A Skills Shortage Crisis?

Last Updated: 24 April 2017
Article by Deloitte Real Estate Group

Most Read Contributor in UK, August 2017

What is the Farmer Review?

At the end of 2015 the Government asked the Construction Leadership Council to identify actions to reduce the industry's vulnerability to skills shortages. The review was carried out by Mark Farmer of Cast Consultancy, which resulted in the publication of the Farmer Review in October 2016. The report focuses in particular on housing although it suggests that the skills shortage can be found throughout the entire construction industry. Farmer believes the industry does not make enough money, which leads to underinvestment in training, development and innovation.

This isn't the first report of this nature, cast your mind back 19 years to 1998 when the Egan Report sought to expose the low profitability and the lack of training investment in the construction industry. Farmer suggests that the issues raised by Egan have still not been addressed and he uses medical analogies to relay a strong message to the industry, which he refers to as a "dying patient" and that it must "Modernise or Die".

The Home Building Fund

In the same month Farmer's views were published, Chancellor Phillip Hammond and Communities Secretary Sajid Javid announced the Home Building Fund. Pure coincidence perhaps? The £3bn fund highlights a commitment from the Government to provide much needed investment in building new housing. Some may argue that the fund provides the answer to Farmers questions. I for one, have a different view. How can we build more homes if we don't have the skilled labour to deliver them?

Pre-fab housing

In his review, Farmer sets a challenge to reduce the reliance for on-site labour and increase off-site prefabrication. I believe this is achievable for residential housing although the commercial sector has a long way to go. nHouse by Studio RHE for example, is a 3 bedroom pre-fab home costing £190k, which proves that off-site build is on the horizon (don't forget the land value!). However, in the short to medium term the question is; how will the housing gap be plugged? Which in my view relies as much on the availability of skilled labour as it does funding.

Skilled labour in decline

Farmer predicts that the size of the construction labour force will decline by 20-25% within a decade. I agree with Farmer in that there will be a decline if certain issues are not addressed. One of the issues is low contractor margins, which directly results in a lack of investment in training. This in turn leads to a lack of available apprenticeships or 'on the job' training schemes for school leavers.

Low contractor margins

A recent article in Building Magazine showed the financial results of eight major contractors and it doesn't make for pleasant reading. Total turnover in 2016 was in excess of £26.3bn, resulting in an overall pre-tax Loss of £60.7m. These figures are distorted due to the losses posted by two of the eight contractors. However, even if you remove these results, the average pre-tax profit for the remaining six contractors is still only 1.66%, with the best only achieving 2.82%.

Will BREXIT impact labour supply?

Farmer also believes that the poor image of the construction industry is one of the reasons there is a low level of new entrants, which has subsequently lead to the need to replace 700,000 retiring workers over the next five years. Add all of the above to the inevitable ageing of the workforce, throw in a dash of BREXIT and there you have it, the perfect cocktail for a skills shortage!

We still don't know how BREXIT will impact the UK labour force in the long term, but according to The Independent 100,000 EU citizens left Britain in the three months after the EU referendum. Not to mention the fact we still await the UK Government's outcome on negotiating the terms of Article 50 and its policies on the movement of labour in and out of the UK.

Apprenticeship Levy the answer?

Just when you thought contractor margins weren't tight enough, from 6 April 2017 the Government's Apprenticeship Levy will come into force, which requires any employer with a pay bill more than £3 million per year to pay 0.5% of anything above that level into the fund. If you are an employer below the £3m threshold, you will not pay into the levy. Instead you will pay 10% towards to the cost of apprenticeship training and the government will pay the remaining 90%. But there is a catch, if the costs of training go over the funding band maximum, the employer will need to pay the difference. I'm not sure that making contractors responsible for funding is the answer. Contractors may also pass the additional costs on to clients, providing it doesn't impact their competitiveness at tender stage, but I believe a commitment from industry clients is also necessary. Why not make clients pay into a levy? The viability of this would seem much more plausible.

The levy should help to increase skilled labour in the long term through apprenticeship schemes, but is it too little too late? Will it prevent the 20-25% decline in skilled labour over the next decade as predicted by Farmer? Furthermore, the levy does not address the challenge of upskilling existing skilled labour.

What next?

I agree with Farmer that a new construction industry body should be formed to promote the industry and to reform training. I believe the Government must increase funding over and above the Apprenticeship Levy to allow apprenticeships to be made more easily available for UK citizens in order to reduce the reliance on non UK labour in the future. I also believe there should be more transparency around apprenticeship contracts and salary bands throughout training and upon qualification. I'm a firm believer that promoting the positive aspects of the industry to schools will entice the next generation into a construction related career. I studied a part time Quantity Surveying degree at Reading University whilst being trained on the job and can therefore fully relate to the benefits that this method brings to both employers and employees.

Whichever way you dress it up, the signs are all pointing one way and based on current trends I agree with Farmer in that we have a skills shortage crisis on our hands, the solution of which must be driven by the Government and also supported by Industry Clients.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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