Construction industry challenges in 2017

30 January 2017

The UK construction industry ended 2016 on an upbeat note, with growing output and an uptick in new orders. However, a number of interconnected factors including growing skills shortage and rising costs could increase risks for construction companies in 2017.

Skills shortage

One of the biggest emerging issues for the construction industry is the growing threat of a skills shortage.

A housing crisis and a need to increase infrastructure investment could create 230,000 jobs in the construction sector over the next five years, according to the Construction Industry Training Board (CITB).

But while demand for skilled workers is set to rise, this has not been reflected in investment in training and skills, which has been lagging in recent decades.

The Royal Institute for Chartered Surveyors (RICS) believes that the UK is already in the grip of its worst skills shortage in 20 years. A survey of RICS members found that 56% believed that a shortage of skills were already constraining growth.

Brexit uncertainty

Compounding the problem is Brexit, which creates uncertainty around access to foreign workers from the European Union. The RICS warned that a loss of access to EU skilled workers could impact the industry’s ability to build much needed infrastructure and housing, unless alternative arrangements are made.

One potential consequence of a skills shortage in construction is likely to be an increased focus on diversity. According to the National Centre for Diversity, only 3% of the construction workforce is from black or an ethnic minority, while the proportion of women in the construction workforce dropped from 19% to 13%. If the industry is series about managing the skills shortage it will need to make itself more attractive to these groups.

Risk implications

First and foremost, a growing labour shortage would place a higher value (cost) on skilled workers, but there are also likely to be implications for workplace safety and liability.

Potentially, a shortage of labour could result in a more transitory and less skilled workforce. This could in turn affect safety and quality, as it is more challenging to bring short-term workers into a company’s safety culture and training programmes. There is also some evidence to suggest transitory workers are more likely to bring a personal injury claim against their employer.

Inflation increase

The other big issue that emerged in 2016, and is set to continue into 2017, is inflation. The cost of building materials has been increasing – in particular imported materials, which account for a quarter of UK construction materials, are affected by the depreciation of the pound since the Brexit referendum in June. The cost of timber, for example, was up 20% while Spanish slate prices rose 22%.

Margins in the construction industry are already tight and the industry has little room to absorb price increases. Critically, inflationary pressures will challenge construction companies that may have to fix prices months and years ahead of completing a project.

Increased automation

New ways of working, including increased technology, will be an emerging risk for the construction industry longer term.

We are likely to see an increase in the use of new materials and a move towards pre-fabricated or modular building as the industry looks to increase productivity. 

This could see a shift towards a more automated and manufacturing-based approach to construction, which could improve workplace safety risks, but potentially bring about greater supply chain and product liability risks for construction firms.

How can insurance brokers help?

Clearly the root causes of these issues are outside of an insurance broker’s sphere of influence. However, this does not mean that we cannot assist.

In this environment, flexible benefits and other measures to create a more attractive work environment – including continuing professional development and training – should create a more loyal workforce and avoid some of the disruption of a market-wide labour shortage. Brokers can assist with the provision of the former and will contribute to the latter with risk and insurance based content focussed on construction industry issues.

From a cost perspective, long term agreements with insurers are now commonplace, providing a measure of qualified cost stability over the short to medium. Given the levels of completion in the market, we can foresee these developing in 2017 to provide more medium to long term protection through the wider application of evergreen or continuous policy period deals.

Finally, advances in technology are continuing to have a significant effect on the industry. Businesses need to understand the insurance issues associated with the use of modularised or prefabricated building element, particularly for construction all risks and third party liability policies. Your broker should be able to assist you with this.

For further information, please contact Dave Cahill, Senior Partner on +44 (0)20 7558 3482 or email dave_cahill@jltgroup.com