Construction sector upbeat over short term prospects but longer term challenges remain

Despite the COVID-19 pandemic, 85% of construction firms say they feel positive about their prospects for the year ahead, according to a new survey from accountancy and business advisory firm BDO.

While acknowledging the ongoing economic challenges, two thirds (66%) of construction industry respondents said they expected their revenues to rise over the next 12 months, with over half (54%) saying that they expected profits to rise.

While construction output fell dramatically in early 2020 at the time of the first lockdown, the sector has since rebounded strongly, due in part to the easing of restrictions and a buoyant housing market. Contrary to expectations, insolvencies in the construction sector fell by 27% in 2020 versus the previous year, as government incentives and support schemes helped prevent business failures.

While the high level of optimism for the year ahead suggests that businesses have a secure order book in the short term, BDO’s survey also highlights a number of longer term challenges.

Issues around labour-supply came up as a consistent theme in the survey responses. For example, recruiting the required skills proved to be a prevalent issue for 69% of construction companies. Meanwhile, almost half of respondents (45%) reported that skilled labour shortages were one of their top three operational concerns for the year ahead. Winning the war on talent was also cited as the top area for planned investment in 2021.

While the construction sector as a whole appears to have emerged relatively unscathed from the pandemic, 91% of respondents said they were worried to some extent about the risk of supply chain failure. Many also report ongoing issues with low-balling to win tenders, overtrading risks and weak cashflow which raise concerns that insolvencies may start to rise when COVID-related Government support begins to wind down.

However, construction businesses are taking action to strengthen their own operations by investing in areas such as back office IT, Building Information Modelling (BIM) software and research and development (R&D). Sustainability is also on the agenda for many companies, although only 37% of firms said they had a plan in place to achieve carbon neutral targets.

Paul Fenner, BDO’s Head of Construction said:

“By and large, construction firms have responded positively to the pandemic and output has recovered well from the initial shock. Clearly the Government support packages have helped many to weather the storm, but firms have also taken sensible action by cutting costs and keeping a close eye on cash flow management.

“It’s very encouraging to see so many firms feeling so upbeat about the year ahead. Businesses can see they have a pipeline of work through 2021 and, for larger projects, running into the next few years. However, there are reasons to be worried. Construction builds for other sectors and many of those are not in good shape.

“Looking ahead, construction firms will need to maintain strict financial discipline as we enter a very uncertain period. Avoiding overtrading and carrying out proper due diligence on businesses in the supply chain will be key.”