United Kingdom / Coronavirus Insights
Shaky Foundations: COVID-19 and the UK Construction Sector

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by Thomas Falconer, Industry Analyst
Jun 22 2020

The construction sector is significant to the UK economy, contributing just under £29.5 billion to the UK economy in Q1 2020, equal to 6% of total UK economic output according to the Office for National Statistics (ONS). Meanwhile, it provided over 2.3 million jobs, just over 7% of all UK jobs registered in the quarter.

COVID-19 (coronavirus) has sent ripples through global markets and the construction sector has already suffered heavy losses due to prevalent supply chain disruption, a marked decline in output, and lacklustre new order volumes. This article looks at the immediate and deeper impact the coronavirus pandemic has had on UK construction, the sector’s immediate response, and analysis on the longer-term view for the sector.

Operational changes

Coronavirus-induced disruption to construction activity has been frustrating for contractors. Towards the end of 2019 and through the early stages of 2020, an air of cautious optimism emerged in UK construction as investor confidence improved following the snap general election in December 2019 and the UK’s formal withdrawal from the European Union on 31 January 2020. Compounded by sustained policy support to drive homebuilding activity and promises of an ‘infrastructure revolution’, it seemed as though the construction sector was on the verge of reaping the benefits of a new investment cycle. However, the coronavirus pandemic forced the construction sector to pull its spades out of the ground.

On 23 March, the UK government outlined a number of measures to reduce day-to-day contact between people, with the ultimate aim of controlling the spread of coronavirus. While construction was permitted to continue during the pandemic and actively encouraged to continue as restrictions have been loosened, the health risks presented by the outbreak forced many contractors to pause on-site activity and review on-site procedures to ensure they are protecting their workforce and minimising the risk of spreading the virus.

In response to the government’s implementation of lockdown measures, and to provide clarity for construction firms, the Construction Leadership Council (CLC) formulated a set of Site Operating Procedures (SOPs). First published on 23 March and subsequently revised, with a fourth iteration published on 18 May, the document was produced to ensure sites implement social distancing requirements by limiting the number of people on site at any given time or altering site access protocol.  Operators failing to abide by social distancing rules could face action from the Health and Safety Executive.

Immediate impact

While construction activity was and is permitted to continue, many contractors entered a period of indefinite hibernation to undertake risk assessment, review on-site operations and implement new measures in accordance with the CLC’s SOPs. Reflecting UK-wide construction site shutdowns and disruptions from social distancing measures on ongoing projects, total construction output plummeted by 45.2% in April according to figures from the ONS, representing the largest decline since monthly records began in January 2010. In April, new work and repair and maintenance dropped by 44.2% and 47.3% respectively, with activity in the residential, non-residential and civil engineering markets declining as a direct result of, or accelerated by, the coronavirus pandemic. The ONS Business Impact of COVID-19 Survey (BICS), which captures businesses responses on how their performance has been affected in a given two-week reference period, backs up this claim of a coronavirus-led impact on construction, with 100% of UK construction contractors surveyed between 4 and 17 May stating that the coronavirus outbreak was the main reason for their enterprise’s turnover being outside of the normal range in the previous two weeks.

 

Deeper repercussions

Put simply, the coronavirus pandemic caused construction output to nosedive. As mentioned, many sites temporarily closed, with the ONS BICS finding that 29.1% of UK construction sector firms surveyed between 23 March and 5 April had ‘temporarily closed or temporarily paused trading’. Many projects have inevitably been delayed, subject to review or cancelled. However, the impact of coronavirus on the sector goes deeper than a decline in output volume. In particular, concerns have mounted over supply chain disruption, while cashflow has become an increasingly pressing issue as reserves dry up.

Relative to supply chains, downsized capacity in industrial markets globally, impermanent adjustments to customs procedures, and prolonged closures among supply merchants have resulted in extended lead times for construction materials, pushing up costs as contractors endeavour to source alternative suppliers. According to the ONS BICS, 39.1% of UK construction contractors surveyed between 4 and 17 May stated they were able to get the materials they needed from within the United Kingdom, but that they had to change suppliers or find alternative solutions, while 15.3% were unable to source the materials they needed. Meanwhile, 24.5% of UK construction firms surveyed stated that ‘prices increased more than normal’.

Cashflow is arguably the most important consideration for any profit-making business and, with the pandemic forcing contractors across the UK construction sector to downscale on-site activity, insolvency pressures are now an unfortunate prospect for many. Delayed payment schedules, potential contractual issues and heightened operating costs, all borne from output disruption, have resulted in cashflow issues among contractors, edging the majority of contractors closer to the red. According to the ONS BICS, 53% of UK construction sector enterprises surveyed between 4 and 17 May believed their cash reserves would last up to six months, compared with 42.4% of businesses across the UK economy. Further to this, 5.7% of construction firms believed their cash reserves would last for less than one month, compared with 3.7% of all UK businesses surveyed, while 40.2% of contractors reported that ‘turnover decreased by more than 50%’ between 4 and 17 May.

Industry response

As a result of the coronavirus pandemic, construction sector volume output has declined, supply chains have been disturbed, and cashflow has become a more prevalent concern for many firms. In order to alleviate these concerns, contractors have turned to government-endorsed schemes and initiatives.

Many construction firms have leveraged the Coronavirus Job Retention Scheme (CJRS), introduced on 20 March, to help financially navigate the pandemic and retain employees during the crisis. Under the CJRS, employers can submit a claim for 80% of a furloughed employee’s wages, up to a maximum of £2,500 per month. According to HMRC, which administers the CJRS, the UK construction sector had 679,600 employments furloughed through the scheme by 31 May, with 154,400 employers from the sector applying for support and the value of claims made totalling approximately £1.8 billion. As a proportion of total CJRS claims, the construction sector accounted for just over 7.8% of employments furloughed and just under 14.5% of all UK employers that applied for the scheme.

The Self-Employment Income Support Scheme (SEISS) has also been widely used in UK construction during the pandemic, considering a significant number of self-employed individuals are active in the sector. HMRC states the construction sector has the highest number of people, at over one million, potentially eligible for the SEISS, which grants up to 80% of average monthly trading profits capped at £7,500 in total. By 31 May, HMRC had received approximately 801,000 claims from the construction sector for the SEISS, which equated to 33.7% of all SEISS claims, totalling just under £2.9 billion.

Final thoughts

The consensus agrees construction output volumes in 2020 will be subpar to say the least. Meanwhile, at least through the near term, new orders will likely remain underwhelming as investors, developers, project managers and other construction stakeholders take time to review spending plans amidst an economic slump. As lockdown measures have been eased, construction sites have begun to reopen to help decelerate the downturn in business activity. Exemplary of this, the ONS BICS found that between 4 and 17 May, 80.4% of UK construction enterprises surveyed were ‘continuing to trade’, compared with the 70.9% that responded with the same answer when asked of their current trading stated between 23 March and 5 April. While daring to dream of an economic recovery on the horizon, contractors remain aware that a challenging operating period will ensure, and will question whether current supportive measures, like the CJRS and the SEISS, go far enough. However, the construction sector is uniquely placed to drive economy recovery, if the correct supportive mechanisms are in place. From both the state and private financiers, promises of an ‘infrastructure revolution’, ambitious housebuilding targets, and monetary reassurances are vital to putting those spades back in the ground and helping both the sector and the wider economy to recover.

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