The current economic situation can be linked to a combination of variables, the deregulation of the banking sector in 1998, low interest rates which were significantly lowered and maintained to counter the economic aftershock of the terrorist attacks on the World Trade Centre in 2001 and the easy availability of credit particularly in the sub-prime US housing sector. The persistent stagnation of the economy is a result of structural imbalances in the world and UK economy and the high levels of government and consumer debt, this situation is the backdrop of the current UK construction industry.
Current Demand
In the current recession the potential for state intervention has diminished with the general decrease in the size of the state in the 1980s and 90s and the current state of the public purse. The coalition government economic policy is the reduction of the structural deficit through a lessening of public expenditure and a reduction in the size of the public sector. The opposing Labour Party policy is to spend more to stimulate growth while also attempting to reduce the deficit. Their belief is that stimulating demand will act as a catalyst to stoke the economy, the possible danger to this approach is the potential for the downgrading of credit ratings and the threat of spiralling interest rates. Recently the Labour Government employed fiscal stimulus measures to fund capital spending during the recession of 2009. The coalition approach is a more accelerated reduction of state expenditure which they maintain is necessary to satisfy the apprehensive bond markets and maintain low interest rates which will stimulate consumer demand. This strategy also serves to deflate the currency which they maintain will serve to stimulate demand for exports. The danger with this approach is that it can precipitate a downward spiral of reduced confidence, more cutbacks and austerity and a slump in domestic demand. This was the case through similar policies pursued in what has been defined as Japan’s lost decade.
It is a fine balance and the intricacies of global events and how they interact coupled with structural imbalances in the world economy are currently dictating policy. The dangers of abstaining from implementing austerity measures has led to stock market volatility and spiralling interest rates on borrowing requirements of certain European countries that threatens to destabilise the world economy. It is these fiscal limitations and the high levels of existing and structural debt that act as a straightjacket to any real effort to generate demand in the UK construction industry by more rigorous application of Keynesian style intervention. Pursuing austerity may prove to be an inadequate response, the outcome of current events is uncertain, the lessons of history obscured. Employing tough stringent austerity measures to remain within European fiscal union rather than defaulting may be delaying the inevitable for heavily indebted nations. Economic policy is contested, there is no consensus and the outcome is uncertain, what is certain are the financial restrictions imposed on government for meaningful economic intervention in the UK construction industry.
The reduced demands and subsequent contraction of the construction industry is a cycle repeated during recessions. An EC Harris survey conducted in 1993 found that UK construction orders fell from £32,500 million to £21,125 million, a fall of 65%, while employment figures over the period showed a fall of 580 jobs a day over that period in the construction sector (Gunaratne, 1993). More recently output fell from £104.89 billion in the second quarter of 2007 to £91.86 Billion in the first quarter of 2009, (Ross, 2011). An inevitability of economic downturns is subsequent impact on the construction industry. The effects of persisting stagnation on the construction industry are becoming increasingly apparent. The pressure on the public purse and the slump in private demand has resulted in supply overtaking demand. Prior to 2008 there were 15 years of sustained growth (Rawlinson, 2009).This growth was underpinned by easily available finance for speculative developers and a need to upgrade many public buildings.
Client/ contractor relationship
The rapid deterioration in economic conditions has resulted in a sea change between clients and employers. Whereas contractors and employees had an abundance of opportunity and the clients and employers were paying premium rates and in some case were being exploited the opposite is the case. Contractor prices which were affecting affordability have been corrected through the scarcity of work. A client that can afford to build can do so at excellent rates, regardless of procurement strategy. Whereas previously clients were concerned with affordability, now the concerns are sub-economic bids, post-contract claims, supply chain instability and lack of contractor initiative (ibid). It is important to note that the effect of the recession is not felt equally across nations, regions and industries; it is though a general trend.
Underbidding: There are significant risks to a client going for sub-economic bids, underbidding is a strategy employed by struggling firms to stay afloat, in the current economic climate this strategy is increasing. Some bids are so low that the contractors are buying the work at a loss. In 2010 Connaught won a housing maintenance contract worth £17.5 million, the bid was challenged in court by Morrison as being abnormally low at £5.5 below their bid. Connaught eventually went bust and this had a detrimental effect on the client who paid much higher costs to replacement firms on emergency contract. (David Matthews, 2011)
Underbidding can be a strategy to stay afloat or a strategic decision to acquire work and then reclaim money by exploiting loopholes and squeezing the suppliers. According to Constructing Excellence only 47% of projects finished on price, the contract is the start and not the end of negotiations. (ibid) Underbidding and trying to claw back through the supply chain is contrary to the advice of the Latham Report as it breaks trust rather than building it. Clients and contractors are critical stakeholders and the dynamics of their relationship is pivotal to project success, clients have a responsibility to ensure contractors are capable of fulfilling contractual obligations and therefore must be rigorous in their assessment of bids. Bids that are significantly below others need proper scrutiny. A positive relationship and outcome to projects will not be achieved by awarding work to companies who may be intent on clawing back revenues through squeezing margins of others, it is high risk.
Whereas in recessions of old government intervention might have attempted to stimulate the public sector, there is less buoyancy in this sector. Significant programs of work have been scrapped or significantly downsized such as the £15 Billion Building Schools for the Future programme. Furthermore turmoil in the stock market will potentially dampen private sector demand. When Chancellor Osborne outlined a £83 Billion cut in public sector spending in October 2010 contractors were naturally weary on the impact on public sector clients (O’Sullivan, 2011). In response to events many companies are adopting retrenchment strategies, cutting operating costs and divestment of non-core activities. An employer under pressure to compete will look inwards, into the organisation, the purpose to drive down overheads, increase efficiency, there may be job cuts, wage cuts, reduced investment. This streamlining is inevitable to remain solvent. In construction projects this pressure will be felt down the supply chain, through to sub-contractors, designers, suppliers of materials, plant and labour, it is an inevitability of the so called invisible hand of market forces, the outcome of reduced demand. The plight of employees is shrinking purchasing power due to reduced income and higher inflation, the effects of the weakening currency, also the threat of redundancy and unemployment, for the self-employed less work and lower rates. According to the public sector client survey public sector clients have been saving funds by cancelling projects. Following the Comprehensive Spending review 58% of new projects were shelved, local authorities cut 63% and the health sector 44%. This reduction in jobs naturally leads to an increase in competition by contractors. (ibid)
The coalition government has signalled that a move away from framework agreements is desired to enable SMEs to access work, in defiance, unwittingly or not, public sector survey clients are turning to frameworks to save money, 40 % of housing associations joined over 6 months in 2011. (o’Sullivan, 2011).
Framework relationships, a case study
Dean Engel and Andrew Murphy are land surveyors employed by Balfour Beatty. An account of their experiences provides an interesting insight into the compound effects of cutbacks on the framework agreement EMAC contract servicing the Highways Agency Area 2 Contract. Andy is a long time employee of the company with 18 years of service; Dean is a relative newcomer with 5 years of experience with the company.
According to Andy prior to the credit crunch Balfour Beatty (BB) had an issue with training graduates and retaining them as they swapped companies to attain promotions and higher incomes. BB Staff packages were very competitive so more could be earned elsewhere. The situation now is that BB retains staff more easily says Andy, this seems logical; where there is less demand in the workplace loyalty may carry more weight especially if there is risk of redundancies.
Andy has benefitted from consistent and often generous pay increases, he has a final salary pension, a company car with fuel card, is satisfied with his income, employment status and the investment the company has made in him while employed and is now a chartered surveyor. He has benefitted from training courses and has a good annual leave entitlement. The company has clearly made efforts to retain him and has been successful in doing so.
Dean has had a different experience having been employed after the credit crunch when the company recruitment policy altered to reflect circumstances. BB now has an abundance of graduates and can select high quality individuals on competitive packages while the rate of staff retention has improved according to Andy. Both Andy and Dean have had their incomes pegged back, last year there was no pay increase while this year there has been a 1.9% increase. Andy’s income increased steadily over his first years of service whereas Dean’s has been suppressed due to the economic circumstances and he has not been offered a final salary pension. Also Dean has not been promoted through the grades as quickly as was previously the case because of the increased staff retention and subsequent lack of promotion opportunities.
According to Andy Balfour Beatty has a significant order book, with ample major projects on the horizon such as the high speed rail link, and major on-going works such as the M25 widening scheme, a £700 million sewerage processing works announced on the 4th Jan 2012, to name but a few. In defence of Balfour Beatty they are scrutinising costs and overheads to remain competitive, on this contract they have a public client in the Highways Agency who are themselves under pressure to reduce costs. The experiences of these men are interlinked with the wider economy and their experiences are probably shared by many. As Dean says, despite the disparity in incomes, the reduced holidays and pension entitlements, he believes that what he earns is competitive and he is grateful to be in employment, he does though complain that the company “takes the piss”.
The case of these two workers reflects the effects of market forces on the economy. Reduced demand and increased supply has reduced their market value, without the protection of contracts of employment they could well find themselves surplus to requirements or at the very least find their incomes reduced significantly. The construction industry is largely populated by self-employed persons who do not have the protection of employment to sustain their incomes.
Frameworks are an aspect of client procurement strategy, for the contractor and supply chain they offer stability and agreed pricing models, this stability offers contractors the opportunity to invest in personnel training and inward investment in their capital base. The problem now is that clients increasingly recognise that they can acquire at lower capital costs and this disrupts stability.
Corruption
There has always been a whiff of corruption associated with the construction industry, the structure of the industry, the high level of competition, the interface of so many people along a complex supply chain. From inception to the construction a diverse array of actors can benefit from illicit backhanders, the potential for wrongdoing is immense and many fall foul to the temptation of easy money. It can be at a corporate or individual level, over recent years the Office of Fair Trading (OFT) has been immersed in an investigation to expose bid rigging, in March 2007, 57 companies and the OFT uncovered evidence of bid rigging involving over a 1000 contractors in contracts worth over £2.9 Billion (Agapiou, 2008)
Employer/employee relationships
Employer/ employee relationships are affected by the recession. Unemployment, wage pressure, insecurity and increased demands by employers are factors which increasingly strain relationships. These pressures are an inevitability of the trickledown effect of reduced industry demand. According to Experian the construction sector is forecast to shrink 4% in 2012.
According to one survey, employer employee relationships are at an ‘all time low’. The reduced demand on construction projects is impacting on salaries of workers. A Hays Montrose survey has pointed out that frozen salaries and salary cuts are hitting morale with half of workers surveyed stating that they are unhappy and want to change jobs within a year. Two thirds said they were overworked and 65% said they would stay with their employer if the workload was addressed. (McMeeken, R, 2011)
The UK construction economy has traditionally suffered from a skills shortage. The Egan report, 1998 identified a “crisis in training” trainees had dwindled by half since the 1970s. (Egan, 1998). Construction is a labour intensive industry despite technical developments. The skills and commitment and organisation of employees are of vital importance in producing a good quality product. Egan identified a commitment to people as a fundamental driver of change in the industry.
“Commitment to people: this means not only decent site conditions, fair wages and
Care for the health and safety of the work force. It means a commitment to training and
development of committed and highly capable managers and supervisors. It also means
respect for all participants in the process, involving everyone in sustained improvement
and learning and a no-blame culture based on mutual interdependence and trust.”(Egan, 1998 p.14)
A report by Cardiff University has found that the economic downturn has not deterred some construction companies from training new staff. Some companies are using in house staff to become trainers and are renegotiating contracts with external trainers and employing more e-learning. There are firms that cut training but these are in the minority. Expenditure on training has reduced but not as dramatically as forecasted. (BBC, 2011)
In a contrasting report by CITB-Construction Skills their survey of 1500 employers found that quarter of businesses states cut their training budget in 2009. The rates varied regionally with 37% of companies in the North West. It added that 10% of companies increased their training budgets. (Peacock, 2011)
Construction companies are tasked primarily with making money, they are not philanthropic enterprises and they operate, or at least should, within the legal framework. In the larger companies it is the corporate executives who drive strategy, their responsibility is to their employers, it is their commitment to the goals of the stakeholders that got them the job, and it is an on-going commitment to their interests that maintains their positions. Corporate social responsibility can be viewed cynically as being rhetoric, companies are not entities, their primary goal is profit, and everything else is at best secondary. In a capitalist system not achieving sustained profit leads to liquidation. In recession where profit margins are under pressure, employee and employer relationships are increasingly strained.
Self-employed
The construction industry is fragmented, because of fluctuating demand the industry is structured in such a way as to rely on the flexibility provided by self-employed staff. This removes employer requirements to statutory employment benefits such as holidays and sick pay and contributes towards pensions. It also allows companies to meet demand quickly by employing short term staff to fulfil fluctuating demand requirements. In recession it is natural that a large brunt of the economic pain is bared by this group.
The industry has always been structured to cope with a reduction in demand by relying on the self-employed. The downside is the lack of investment in personnel, low skills, poor quality output and an inability to attract the talent in numbers required to drive the industry forward with meaningful purpose.
Jimmy Mannion is a contract site engineer; he has been employed in this capacity for fifteen years. Over the last five years he has seen his income reduce dramatically; at times he has struggled to find work. Prior to 2007 he earned £23 per hour as a construction site setting out engineer, this has reduced to as little as £14 on some projects and he often finds himself unemployed for periods, particularly over the winter months. According to Jim the mood on sites has noticeably changed, whereas he was once more self-assured and confident of acquiring work and enjoyed the freedom of self-employment, that has now been replaced by insecurity, this he says is a common emotion amongst personnel. He has to work harder as projects are often under employing to cut costs, he has also noticed a change in attitude on jobs by site management, this he attributes to the reduced dependency on men because of the surplus available.
Conclusion
The construction industry is encountering major turbulence and the government is not providing significant opportunities to maintain pre-crisis levels as the capacity to control demand has diminished. The industry will survive, more skilled staff will leave and never return and the industry will be worse off for their departure. A positive of events may be the restructuring of industry to becoming leaner and more efficient.
Clients and employers need to act responsibly; the people of the industry are the main strength. Clients need to support contractors by questioning the credentials of tenderers, contractors need to procure on the basis of sound fundamentals, supply chain integrity requires honesty, trust and respect. The role of the government may have reduced in terms of generating real demand but it needs to adapt and take on the mantle of enforcing best practise. If the industry wants to attract and maintain talented individuals it requires structuring accordingly.
References
Agapiou, A (2008) “Corruption in construction” CIOB Ambassador, , spring 2008, 29.
Benson, T.H.L. Oo, B. L. and Ling, F. (2010) “The survival strategies of Singapore contractors in prolonged recession” Engineering, Construction and Architectural Management, vol. 17, no. 4, 2010 pp. 387-403
Egan, J. (1998) “Rethinking Construction” The Report of the Construction Task Force
Elliot, L and Allen, K. (2011) “Britain in grip of worst ever financial crisis, Bank of England governor fears”. The Guardian, 6.09.11 ) [accessed, 14th January, 2012]
Green, F. (2011) “UK staff trained despite recession research claims” Available from: http;//bbc.co.uk/news/uk-wales-12398655 [Accessed 14th January, 2012]
Gunaratne, P.L. (1993), “Building up from the recession” Volume: 5 1993. Available at [Accessed: 14th January, 2012]
Matthews. D, (2011) “Underbidding” Building, 18.03.11pp 36-39
McMeeken, R. (2011) “Any life out there?” Building, 16.09.11 pp. 36-38
O’Sullivan, B (2011) “Hard Numbers” Building 08.04.11, pp.22-23
Rawlinson, S. (2009) “Procurement update” Building, 28.08.09, pp50-53
Ross, A. (2011) “Supply chain management in an uncertain economic climate: a UK perspective” Construction Innovation, vol. 11 no. 1, pp. 5-13
Chris Jones Construction Industry EnvironmentPage
