Construction companies in the United Kingdom reported a major slowdown in building activities over the months of July and August amidst rising inflation and looming political uncertainty.
As the country saw inflation rise above 10% for the first time in 40 years, UK citizens are feeling the pressure from the rise of cost of living, and are holding back on discretionary spending for things such as home improvements and renovations.
Construction experts have been puzzled over the precise cause of the decrease in business in a reopened economy, with some attributing it to consumer anxieties, apprehension over prospective energy policies from Parliament, this summer’s record heatwave reducing the pace of progressive work, and even a debate over the nature of modern construction contracting.
According to S&P Global/CIPS UK Construction Purchasing Managers’ Index, which gauges monthly changes in overall industry activity, firms experienced another consecutive month of activity reduction. Reported at 49.2 in August (a marginal increase from July’s 48.9 rating) — the assessment still sees itself below the index’s “no change mark” of 50.0.
Across three tracked categories — civil building, commercial building, and private home construction — both civil and commercial building showed the sharpest decline over July and August. While the final category of private home construction saw a lift, its impact was reported as only fractional.
Impending recession fears sparks may bring sharper building decline
Central in this struggle has been speculation on possible sector relief following the appointment of a new prime minister, Liz Truss, on September 6.
With the maximum energy price cap set to increase to £3,549 per unit in October, the Bank of England predicts inflation will soon rise above 13% and could cause a lengthy recession — resulting in even more sudden stoppages in construction.
“If we don’t act now to prevent inflation becoming persistent, the consequences later will be worse, and will require larger increases in interest rates,” said BOE governor Andrew Bailey. “Returning inflation to its 2% target remains our absolute priority, no ifs, no buts.”
Group director at the Chartered Institute of Procurement & Supply, Duncan Brock, traced the slowdown to stalled bids on essential items such as steel and lumber.
“The heightened competition faced for short supply raw materials as well as essential skills for the building trade is squeezing the optimism out of builders with the lowest business expectations since July 2020,” said Brock.
On the topic of housebuilding, real estate experts point out that the industry has historically been a backbone for the UK market.
“Housing plays a major part in supporting the economy, and as we head into a predicted recession this will prove more important than ever,” said managing director of land agency Walter Cooper, Simon Cox. “I’d therefore implore the new PM to work with those in the industry to provide support in promoting an ‘open for housebuilding’ agenda.
While Truss has campaigned on efforts to aid housebuilding efforts, she has also promised to rescind the Conservative Party’s previous goal of ‘300,000 houses a year,’ and instead “work with local communities to identify sites ripe for redevelopment and reduce planning restrictions,” a stance that many economists deem hypocritical and expect will result in less homes being built to counter the country’s housing crisis.
UK has seen years of construction payment reform attempts
There is a mounting movement within the UK’s contracting industry trying to implement new strategies for settling disputes over late payments.
The impact of “poor imbursement procedures” came under heavy scrutiny back in 2018 with the collapse of the multinational firm Carillion.
The UK’s voluntary Prompt Payment Code, mandating the pledge of paying 95% of company invoices within 60 days in order to continue bids on government work, was widely seen as a hollow gesture with no true means of preventing against bad behavior.
The 2020 introduction of The Small Business Commissioner and Late Payments Bill saw even stricter guidelines and legitimate discipline for late payments if passed, such as cutting the invoice window in half from 60 days to 30, making late payment data public, and curtailing “subbie-bashing:” demanding discounts from subcontractors for paying invoices early, and including contract clauses that prohibit subs from stopping work and/or supply for non-payment.
The same year’s subsequent publication of the government-penned Construction Playbook attempted to standardize the industry by utilizing modern methods of construction (MMC) to ensure a more level playing field for all subcontractors on projects around the country.
Instead of threatening punishments for delays, the Construction Playbook calls for designers and contractors to take the first step into a new model by way of transferring the practice of traditional paper-based contracts and payment orders into a universal cloud-based app while altering traditional contracting’s incremental nature to “deliver significant improvements in productivity, efficiency and quality for both the construction industry and public sector.”
Nigel Blundell of law firm Pinsent Masons stated “MMC creates a raft of new legal issues and relationships because of the significant manufacturing and supply elements of the products. This starts from design where rather than a designer having free reign, there needs to be a ‘design to manufacture’ approach.”
While there have been no significant markers of progress in the current state of the economy, it is with this new school of thought that theorists believe payment disputes can be significantly curtailed — prompting fewer delays on projects and preemptively keeping construction a priority in the uncertain days ahead.