Key Takeaways
- Output grew in 2022-23, as construction work ramped up across the North East, South East, Yorkshire and the Humber and Wales.
- A solid project pipeline, along with the adoption of emerging technologies, will boost construction productivity and output over the coming years.
- Systemic raw material shortages and a tight labour market still threaten the construction sector’s outlook.
The construction sector has long been a cornerstone of the UK economy, making up 7% of UK GDP in 2022. Construction offers employment opportunities across a wide range of skill sets, from manual labour to more specialised skills. As one of the largest sectors and biggest employers across the UK, struggling construction output can take a toll on the wider economy.
Despite supply chain disruptions, lengthened lead times and soaring raw material prices, construction has performed incredibly well since the pandemic. From 2022-23 alone, construction output shot up by 15.3% as infrastructure development, industrial construction and private housebuilding all grew.
Much of the construction work driving up output is concentrated across the North East, South East, Yorkshire and Wales.
Housebuilding activity dominates the South East and Yorkshire. Meanwhile, 2022-23 brought massive gains in infrastructure output in the North East and Wales, up 73.1% and 173%, respectively.
Over Q2 2023, Wales exhibited the highest climb in construction output of any UK region (11.1%), driven by solid infrastructure output growth (25.8%) ahead of the Infrastructure Bill 2023.
The effects of supply chain disruptions
Though construction output has climbed, contractors still face challenges, including the COVID-19 pandemic's lingering effect on global supply chains. On top of this, ongoing geopolitical conflicts have made it even harder for construction materials to flow freely across borders.
Over 2022-23, building material prices climbed considerably amid supply-side shortages, inflating construction output prices. Heading into 2023-24, however, input prices are slowing as supply chains start to show signs of a more permanent recovery.
Since Q2 2023, timber, cement and concrete costs have all declined, showing signs of hope for builders. The Office for National Statistics’ (ONS) reported a Q2 decline of 0.73% for timber costs. Similarly, in July 2023, the price of cement and concrete fell by 0.53%.
Brexit shrinks the construction sector’s labour pool
Labour shortages and trade barriers remain critical points of contention for the UK construction sector, as around 25% of construction businesses are contending with labour shortages post-Brexit, according to the ONS.
To address this, the UK government has introduced the Shortage Occupation List, making it easier for contractors to sponsor foreign workers for various construction roles that are in short supply, including welders, bricklayers, roofers, carpenters, joiners and plasterers.
Still, the government has a long way to go to alleviate the systemic labour shortage and help fix the disruption to raw material supplies since Brexit.
Orders fall for construction companies
Perhaps most concerning for the UK construction sector is the slump in new orders. Since Q3 2022, new orders have dropped every quarter.
In Q2 2023, other new work orders plummeted by 44.9%, led by weak volumes in the health construction and academic sub-sectors.
New infrastructure orders tanked by 29% and private industrial construction by 25.3% – the result of sub-par warehousing and factory project pipelines.
Pipelines also weakened alongside the cost-of-living crisis and the related slowdown in the broader economy. These challenges have created uncertainty in the commercially sensitive construction sector, all while driving a downturn in the award of government contracts in traditional heavy infrastructure, especially in the road and rail sub-sectors.
Nonetheless, with inflation decelerating and building supplies more readily available, UK construction is well-positioned to grow over 2023-24 in line with public-sector investment.
The National Infrastructure Strategy provides a solid infrastructure project pipeline into the future – namely HS2 tunnelling, the A303 Stonehenge tunnel and Hickley Point C. Similarly, the New Hospital's Programme and the Houses of Parliament restoration will accelerate output towards the end of 2023.
In terms of value, private housing construction continues to lead, as evidenced by the solid performance of Barratt Developments plc, the UK’s largest housebuilding company.
Across the board, the outlook for the construction sector looks clouded in the short term, with many SMEs battling against rising interest rates, elevated output prices, labour shortages and increased material and wage costs. The addition of new projects to the pipeline does offer some promise, however, especially for the new housing and infrastructure sub-sectors. Large-scale contractors will have an opportunity to capitalise on these developments.
The impact of new technologies
Over the long term, advancements in technology are set to improve productivity and reduce the sector's reliance on labour.
As the UK increasingly focuses on energy efficiency and sustainable building, the sector is expected to follow suit, with many construction companies bringing energy-efficient materials into their construction process and planning more green buildings.
In addition, newer technologies have already proven essential in enhancing building design, construction documentation and project management. For instance, with building information modeling (BIM), a digital representation of a building facilitates collaboration between architects, engineers, real estate developers, contractors, manufacturers and other construction professionals. BIM will become more commonplace as construction companies learn about how it supports communication and coordination among all of a construction project’s stakeholders.
Augmented reality (AR) and virtual reality (VR) technologies will also help improve communication and collaboration. Through immersive experiences, these tools create a more informed and seamless process, the benefits of which will drive greater adoption through 2023-24.
Finally, larger contractors will be interested in automation technologies that boost productivity, including drones, 3D printing and autonomous vehicles. These solutions enable construction companies to accelerate project delivery and reduce errors, delays and costs.
The shift toward prefabrication and modular construction – where components are manufactured in a controlled environment and assembled on-site – could also help address labour shortages and boost productivity. The adoption of these off-site construction methods will accelerate over 2023-24, bringing increasing confidence and capacity in prefabrication construction solutions. In addition to solving for labour shortages, contractors using prefabricated solutions can save money on procurement and transportation.
Final thoughts
The UK construction sector is on a path of transformation. With advancements in technology, a growing emphasis on energy efficiency and sustainability, and the integration of innovative tools like BIM, AR, VR and automation, builders will have a chance to overcome some of their recent challenges.
With the help of comprehensive research and insights on the UK construction sector and its intersecting industries, you can position your company at the forefront of the broader sector's journey toward progress and sustainability.
