With construction firms facing increased insolvency risk from inflation, slowing demand and the climate crisis, a new report from Turner & Townsend warns against short-term thinking which could derail vital, long-term strategic priorities.

The global professional services firm’s Autumn 2023 UK Market Intelligence Report underlines the perfect storm of challenges the sector faces – from declining demand and interest rate hikes to persistently high material and labour costs – and acknowledges the need for clients to tackle these in the short term.

However, Turner & Townsend is calling for clients to take a strategic approach that will also ensure long-term business benefits.  This includes prioritising sustainability commitments to protect project viability and future profitability.

Despite falling demand, tender price inflation forecasts remain stubbornly high, and unchanged from the summer report.  Real estate forecasts are 3.7 and 2.7 percent for 2023 and 2024, respectively, and 5.5 and 4.5 percent for infrastructure.  More concerningly, total construction new orders have been declining, settling below pre-pandemic levels by 10.9 percent.  The deflationary pressure that might be expected from this slowing demand is being offset by higher borrowing costs, labour shortages, and high material costs, which stand 42.3 percent above February 2020 levels.

Whilst demand in the real estate sector as a whole slows, by sub-sector the landscape is more mixed.  Non-housing repairs and maintenance continues as a growth sector, which was up by 2.7 percent in the last quarter.  In contrast, private housing and private repair and maintenance performed poorly, down by 3.3 percent and 1.3 percent, respectively, reflecting high borrowing costs and tight household budgets.

In infrastructure, the impacts are being felt from the projects rescheduled due to the prolonged inflationary pressure, and a wider cooling of work pipelines, especially in rail and road sectors.  However, pockets of increased investment in other sub-sectors are providing balance.  The water sector is buoyant, with the upcoming start of the new asset management plan period (AMP8), and energy remains strong as the government invests in shoring up the UK’s power supply.

The report acknowledges that clients are becoming more risk-averse as they battle external headwinds and navigate supply-chain insolvencies.  However, Turner & Townsend advises clients to act now to strengthen their long-term strategic approaches.  One key area to protect is sustainability, as energy efficiency and carbon reporting become increasingly important for long-term compliance, attracting investment, and avoiding ‘stranded assets’ in client portfolios.  By putting the right procurement strategies in place, enhancing project controls and focusing on robust programme management, clients will be able to achieve greater value over the long term.

Martin Sudweeks, UK managing director of cost management at Turner & Townsend, said:

“Our industry is currently managing an incredibly complex landscape as we experience both softening demand and the continued input cost inflation.  This is driven in large part by an endemic skills shortage that is pushing up labour costs –sector must work with government and education bodies to tackle the jobs market crunch.

“In the face of immediate cost challenges, it may appear an attractive option for clients to dedicate their efforts to firefighting the issues of ‘today’, while losing sight of commitments to policies like net zero.  However, clients should instead be prioritising their long-term strategies, and understanding how profitability, project performance and sustainability can be complementary goals.  By doing this, clients will be able to achieve both short-term stability and future, strategic success.”