The World Economic Forum estimates that the construction sector contributes 13% of global GDP. Additionally, the construction sector generates a wide range of goods and services, including raw materials, machinery, and professional services. Given the size of this industry, there are many areas that could be improved to optimise its overall functionality.
Let's examine the six key issues that the construction industry currently faces:
1. A SLOW GROWTH RATE
The construction industry is forecast to experience a modest growth rate of 0.8% in 2023. Various ongoing challenges can explain the slow pace of growth, including reduced interest from developers to undertake new projects, the pandemic, and the Ukraine war, which has led to a global economic decline, limited access to project financing, and delayed and liquidated damages.
2. A SHORTAGE IN SKILLED LABOUR & AGEING WORKFORCE
Despite high demand, the UK construction industry faces a shortage of skilled labour, as the total number of workers employed in the construction industry declined from 19% in 2002 to 16% in 2022. The Office of National Statistics (ONS) reported 50,000 open vacancies in the UK construction sector in Q3 2022.
The shortage in skilled labour is expected to be exacerbated by an ageing workforce, with individuals aged 55 years and above making up 21% of the workforce, an 8% increase from 2002. The Chartered Institute of Personnel and Development (CIPD) reports over 1.2 million workers over the age of 65, which raises concerns that this shortage may worsen when they retire.
3. DISRUPTIONS IN THE SUPPLY CHAIN
Poor supply chain productivity in the construction sector has resulted in physical delays and increased costs, with force majeure events such as the Ukraine war and Turkey's earthquake exacerbating the issue.
Effective supply chain management is at risk due to a lack of visibility within the supply chain, sustainability concerns and the growing emphasis on Environmental, Social and Governance (ESG). As ESG grows, there is an emphasis on sourcing alternative sustainable materials, leading to demand for non-traditionally sourced products and causing potential quality issues and cost overruns. Contracts are likely to become more robust, limiting the financial implications of supply chain disruptions.
4. INFLATION & RISING COSTS
Inflation has impacted the construction industry by increasing costs for critical materials. Alongside rising inflation, the escalating costs of tariffs have also increased materials and transportation costs. Additionally, with the escalation in interest rates, the labour costs in the construction industry subsequently rise to accommodate the contractors' own expenses, such as the cost of hiring or purchasing equipment. As a result, contractors are under pressure to re-evaluate their pricing models, factoring in the risk of potential delays and higher costs.
5. CLIMATE CHANGE & ENVIRONMENTAL, SOCIAL AND GOVERNANCE
Climate change will significantly impact the construction industry in various ways. The increasing emission of greenhouse gases has led to more extreme weather conditions, requiring buildings to be designed to withstand these pressures. Furthermore, adverse weather conditions may affect the completion schedule as the weather will slow the rate of construction works.
The production of materials used in construction, such as cement, generates substantial greenhouse gas emissions. Consequently, the demand for sustainable, low-carbon alternatives has increased.
As the world is becoming increasingly conscious of sustainability and ethics, the importance of ESG factors in investment decisions has risen significantly. According to CBI, two-thirds of investors consider ESG when deciding which projects to invest in. Consequently, construction projects that aim to attract investment may need to focus on improving their ESG rating.
6. LACK OF TECHNOLOGY ADOPTION
Despite the rapid development of technology, such as Artificial Intelligence, the construction industry has been slow to adopt innovative solutions. Innovation often involves significant investment of time and resources; without a strong demand from clients and stakeholders for technological advancement, the industry may be less inclined to prioritise innovation.
Key Issues in the Construction Industry was discussed in our webinar of 19 January 2023. To view the webinar and supporting notes click here.
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.