The construction sector is “fragile” with “low margins and high risks”, says ICAEW

The construction sector is “fragile” with “low margins and high risks”, says ICAEW

ICAEW has identified the construction sector as an industry that needs to adapt to survive

The construction sector has really struggled in recent years, as competition grows, and the economy becomes increasingly unstable.

The Institute of Chartered Accountants in England and Wales (ICAEW) has recently announced the release of their Audit Insights report, with a focus on the issues within the construction sector in the UK, and how these can be addressed.

The main issue is the lowest-price tendering in order to remain competitive and win the contracts; contractors are being forced to price work at unrealistically low levels. Unsurprisingly, this is likely to have serious consequences for the industry if this trend is not addressed.

“Clients are often only looking for the lowest bid, which, in turn, encourages construction companies to offer unsustainable low prices, in the hopes that some aspect of the project will subsequently change to improve their profits. Unexpected changes can then turn small profits into losses and make it difficult to return a project to profitability.”

In the summary of the report, ICAEW has outlined that they have fours on four key areas that construction firms need to prioritise addressing:

  • Bidding for lasting value.
  • Delivering for success.
  • Rebuilding confidence through increased transparency.
  • Getting fit for the future.

ICAEW has warned the construction industry that this “race to the bottom” could lead to more firms collapsing. There is an increased danger for smaller firms, should the supply chains become damaged.

“The UK construction sector continues to suffer from a reputation that it lacks enough transparency, particularly on cost and performance. In many cases, poor or unexpected results are caused by a lack of internal transparency.”

The accounting body said: “This pressure is further compounded by the longest decline in bank lending for construction companies since 2011 – because of fears of a downturn in the economy and the impact of Brexit – at a time when firms need to manage their debt.”

They continued: “To counter this unsustainable procurement culture, the report provides practical guidance and recommendations to help ensure the long-term success of the construction sector and the businesses that work within it.”

The construction sector is one of the key drivers of growth for the UK economy, and yet it is “fragile”, with “low margins and high risks.” It is clear, then, that the industry needs to build a stronger foundation moving forward.

“[W]e are […] seeing businesses budding at too low a price for large complex contracts, in the expectation that they will improve their profit margins because some aspect of the project will change,” ICAEW added.

“Contractors need to be more selective over which projects to bid for and ensure that they properly understand the risks.”

“The construction sector is complex,” Andrew Hobbs, chair of the Audit Insights working group and EY partner, agreed. “Clients are often only looking for the lowest bid, which, in turn, encourages construction companies to offer unsustainable low prices, in the hopes that some aspect of the project will subsequently change to improve their profits. Unexpected changes can then turn small profits into losses and make it difficult to return a project to profitability.”

This perhaps comes down to one of the key areas the accounting body has identified as a major point of contention: transparency. Due to the pressure they come under to win the contract, companies can feel obligated to promise more for a lower price, even if they suspect they may struggle with the fulfilment of the agreed terms.

ICAEW stated: “The UK construction sector continues to suffer from a reputation that it lacks enough transparency, particularly on cost and performance. In many cases, poor or unexpected results are caused by a lack of internal transparency.”

“We welcome the government’s announcement of £600bn in infrastructure investment over the next 10 years. However, major infrastructure programmes have historically been difficult to implement within expected timescales. The government will need to commit to specific timings to guarantee that projects will be tendered.”

Furthermore, embracing innovation and technology will only aid the construction sector as they navigate changing future practices, as well as helping to attract a new group of diversely-skilled labour.

Hobbs said: “A robust approach to responsible project procurement and bidding is essential and needs to be supported by both sides. Contractors need to be more selective over which projects to bid for and ensure that they properly understand the risks. Clients need to ensure that tenders are based on best value and past performance, rather than cost alone, and that they include performance incentives.

“The sector will need a labour force that has the right skillset to work with new technologies and new manufacturing methods. Currently, the construction industry, like many others, is experiencing a shortage of skilled labour. This must be addressed as quickly as possible. This means showcasing the diversity of roles required, including: planners, architects, surveyors, engineers, and skilled trades people if the sector is to attract young and diverse new workers.”

ICAEW concludes: “We welcome the government’s announcement of £600bn in infrastructure investment over the next 10 years. However, major infrastructure programmes have historically been difficult to implement within expected timescales. The government will need to commit to specific timings to guarantee that projects will be tendered.”

To read ICAEW’s full report, click here.

 

 

What are your thoughts on the future of the construction sector? Follow us on Twitter and Facebook to get involved in the discussion today.

Related Articles

What is keeping entrepreneurs up at night?

Business What is keeping entrepreneurs up at night?

2w Melanie Stancliffe, Partner, Irwin Mitchell
“Brexit is much less of a priority for business owners,” says Price Bailey

Business “Brexit is much less of a priority for business owners,” says Price Bailey

3w Emanuela Hawker, Reporter
“We need to reform our punitive business rates system—and we need to do it now.”

Business “We need to reform our punitive business rates system—and we need to do it now.”

4w Emanuela Hawker, Reporter
“20% of SMEs are running into cash-flow problems because of late payment[s],” says CYBG

Business “20% of SMEs are running into cash-flow problems because of late payment[s],” says CYBG

4w Emanuela Hawker, Reporter
CIMA: 100 years and beyond

Business CIMA: 100 years and beyond

4w Steven Swientozielskyj, President, CIMA
It is more difficult than ever to become a millionaire in the UK

Business It is more difficult than ever to become a millionaire in the UK

4w Emanuela Hawker, Reporter
The UK is proving to be “especially vulnerable” to the volatile global currency market

Business The UK is proving to be “especially vulnerable” to the volatile global currency market

2m Emanuela Hawker, Reporter
UK consultancy market growth impacted by Brexit uncertainty

Business UK consultancy market growth impacted by Brexit uncertainty

2m Emanuela Hawker, Reporter