Construction forecast for 2008

The Association for Consultancy and Engineering's (ACE) third State of business report has recently been published. Developed using data collected from 105 firms who responded to a survey issued in June 2007, the survey aims to forecast the expected growth in key areas of the construction industry during 2008. The firms participating in the survey represent over 10% of the UK's total consultancy and engineering turnover and employ in excess of 30,000 staff. In this article we look at the 2008 forecast.

In general, UK economic growth is expected to slow in 2008; growth in the next year is now seen in the range of 2.0-2.5%, down by 0.5% on previous estimates. These revisions follow turbulence in financial markets precipitated by the sharp rise in mortgage defaults in the US sub-prime market in July 2007. As well as direct effects from lower bonuses within the City, lenders have restricted funds and charged higher interest rates to some consumers and businesses.

Prior to turbulence in financial markets, expectations had been for interest rates to hit 6% or higher before the end of 2008. However, the market now expects interest rates to fall. Recent falls in consumer price index (CPI) inflation mean that the Bank of England Monetary Policy Committee is in a better position to act by cutting interest rates.

Household expenditure rose by around 0.8% in Q2 2007, although more up-to-date survey data has already shown indications that growth of high-street spending and spending on consumer services is lower than earlier in the year. Other downside risks exist from higher oil and food costs having a possible negative influence on disposable income.

The following sections look at the forecasted results from certain sections of the report, along with government predictions for construction orders for 2008 and beyond.

Economic and construction outlook

This outlines the current and future macroeconomic performance. Economic data is taken from the Bank of England and the Office of National Statistics:

UK economic growth is expected to slow in 2008 to around 2.0-2.5%
Relative to past recoveries, investment has played a greater role in the current upswing in growth
In the USA GDP growth was 0.8% in Q2, in part reflecting a recovery in non-residential investment growth following weakness around the turn of the year
Chinese GDP continued to grow at a fast pace in 2007 Q2 with annual growth reported to be almost 12%
UK construction output and order figures are predicted to increase. Output is forecast to rise by 2.4% in 2008 and 3.2% in 2009
Mergers and acquisitions continue as firms buy assets for long-term stable cash flows. Complementary construction businesses to give regional market positions and niche areas of expertise and engineering personnel in cases of skills shortages.

Consultancy and engineering industry structure

This section highlights industry turnover, profitability by sector and the breakdown of the consultancy and engineering market by size of firm and sector of operation.

The largest sector of operation for consultancy and engineering firms is private housing with 70% of firms working in this area. The sector currently accounts for 19% of consultancy and engineering output.

Approximately half of firms working in the private housing market rank it as one of their three most profitable sectors of work. The second most profitable work sector is private offices, which accounts for 9% of total industry output with 69% of firms working in this area. The least profitable sectors are other power, telecoms and aviation.

The smallest market sectors are aviation, other power, telecoms, private health and defence/prisons which each account for 1% of industry output.

Procurement routes and ways of winning work

This section looks at the breakdown of turnover by type of procurement route and the ways in which work is won in the consultancy and engineering sector.

Frameworks currently account for around 22% of turnover. Framework procurement is the second most common form of contract for the larger firms. However, the use of design and build contracts has grown marginally since last year.

More than half of the work won by consultancy and engineering firms is through repeat business, either with or without formal competition. Results show that the smaller the firm, the larger the proportion of work that is won in this way. For the largest firms the majority also appears to be won by repeat business.

Since 2006, the proportion of work won through select tenders/single invitations has increased from 14% to 21%.

UK industry sector performance

This section of the report examines changes in UK workload by sector and the predicted number of new entrants for each market.

Over a half of the survey respondents reported UK workloads had increased by more than 5% in the first half of 2007 compared with the same period a year earlier. This is faster growth than was predicted in 2006.

The strongest performing sectors are predicted to be other power, nuclear and wind energy and the leisure/entertainment sectors, with the pace of expansion in the latter gathering further momentum during 2008 and 2009.

The rail sector shows signs of strong performance over the next three years with over half of firms expecting growth in this sector. The slowest rates of growth are predicted in the other industrial, telecoms, public health, and private education sectors.

Business orders

Not usually part of the State of business report, orders nonetheless give an indication of the relative health of the industry. Unfortunately, construction orders in the twelve months to October 2007 were unchanged compared with the previous twelve months. Orders actually fell by 3% in the three months to October 2007 compared to the same period a year earlier.

Decreases in public non-housing, public housing and private housing served to offset increases in private industrial and private commercial orders. Private housing orders fell by 3% compared to those in the previous twelve months. Orders in the three months to October 2007 fell by 12% compared with the same period a year earlier.

Public housing and housing association orders were unchanged in the twelve months to October 2007 compared with a year previous. Infrastructure orders rose by 8% in the twelve months to October 2007 compared with the previous twelve months. Public non-housing orders (excluding infrastructure) rose by 7% in the twelve months to October 2007. Private commercial orders rose by 1% compared with the previous twelve months, but orders in the three months to October 2007 were 6% higher compared to the same period a year earlier. Private industrial orders in the twelve months to October 2007 fell by 12% compared to the previous twelve months.

Industry concerns for 2008

For the second year running the top concerns for consultancy and engineering firms appear to be skills shortages, delays in payments and low fee levels. The larger the firm, the more acute the concern about skills shortages; around three quarters of construction firms rank it as their top issue.

Construction businesses in general were less concerned with outsourcing, off-shoring, industry consolidation and the number of government and EU regulations. Also, the number of firms ranking professional indemnity (PI) premiums as a concern has also dropped, from 45% to 32%.