Construction in Great Britain: An Economic Analysis

We appreciate the contributions of the following BIS analysts and other departments who contributed to this article: Magdalena Barawas Charlotte Fleetwood Keith Folwell Richard Garrett Isabel Hacche James Liley Steve Liston Nick Scott Aloke Siddique We are also grateful to colleagues at BIS and other government departments for helpful comments and comments. Special thanks are due to Graham Ive and Alex Murray of University College London for carrying out an empirical analysis of the role of trade in credit in construction and EC Harris for undertaking research into the UK construction supply chain

Preface

In September 2012, BIS Secretary of State Vince Cable announced a review of the key strategic sectors for UK growth and competitiveness. Construction is one of them. Historically, the UK construction sector has been a key sector for the UK economy and a key growth driver. Despite the challenges the sector has faced recently, construction continues to be one of the largest sectors in the UK and the main source of UK value added and employment. However, the global construction market is undergoing a major transformation as companies continue to respond to the challenges of the economic crisis since 2008, start to change green and sustainable construction, and seek to seize the opportunities provided by the digital economy. The competitiveness and readiness of the UK construction sector will be crucial if the UK is to seize these opportunities. This document reviews the latest evidence to inform you about the industrial strategy for Constructing and providing insight into the most important factors and barriers to growth in UK construction. It builds on two new studies commissioned by BIS specifically to inform the strategy, in particular: a study on construction trade credit in the UK by Graham Ive and Alex Murray from University College London and a Supply Chain Analysis for the UK construction sector by EC Harris. I am grateful to the researchers and analysts who have contributed to this work and for the information they have provided that supports policy development in this key sector. Andrew Rees Acting Chief Economist and Head of Strategy and Economics at AMS Department of Business, Innovation and Skills

Summary

Construction overview

The construction sector is a key sector for the British economy. To this end, the construction sector is defined as: (i) the construction sector; (ii) providing professional construction services; and (iii) construction related products and materials 1. Construction is one of the largest sectors of the British economy. It contributes almost £ 90 billion to the UK economy (or 6.7%) 2 in terms of value added, includes over 280,000 companies 3 covering around 2.93 million jobs 4, which is around 10% of all UK employment. Since the recession in 2008, the construction sector has been disproportionately affected. In 2007, the construction sector accounted for 8.9% of UK Gross Value Added, but by 2011 the sector's contribution had fallen to 6.7%. In early 2012, the construction contracting industry returned to recession for the third time in 5 years. Despite the recent economic and financial crisis affecting the most developed economies, the UK construction contracting industry by volume remains one of the largest in Europe in terms of employment, number of businesses and gross value added 5. However, in the UK the construction industry is also more fragmented than its main European competitors and evidence shows it has a higher level of subcontracting 6.

British construction in the global economy

Over the medium term, demand is likely to be influenced by many overarching construction factors. These include: globalization, demographic change, demand for green and sustainable construction, both in the UK and abroad, increasing the importance of technology in construction, and increasing demand from emerging economies such as China and Brazil. 1 The definition does not include the distribution and sale of construction products. 2 Source: ONS Annual Business Analysis (ABS), preliminary results 2011. Data relate to (i) construction contract industry; (ii) providing professional construction services; and (iii) construction related products and materials. Information on the SIC codes used can be found in the appendix. ABS is preferred as it is the only source with sufficient detail to enable Gross Value Added to be calculated for the wider construction sector and to compare wider construction with other industries. It should be noted that the national accounts of the ONS (2011) give a gross value added for construction contracts of £ 90 billion making the power output adjustment not registered by ABS; you can't calculate a figure for a wider structure from national accounts, but it is likely to be higher.

Factors driving long-term growth

Access to overseas markets and increasing export activity is one of the factors of growth, there are a number of other factors which, when properly and effectively implemented, can be influenced by the growth and competitiveness of the UK construction sector. They are summarized below.

People and skills

Global and national opportunities in construction mean that a skilled and flexible workforce will be critical to the UK construction sector's future performance and competitiveness. The evidence of qualifications is positive and shows a growing percentage of people with higher qualifications. However, there has been a significant decline in internships in construction related industries over the past three years, the number of completions in other sectors has steadily increased. Moreover, around one fifth of all job vacancies in the wider construction sector are permanent and difficult to fill as employers cannot recruit workers with the appropriate skills, qualifications or experience 11. Lower percentage of construction companies provide training and developed training plans than in other sectors on average. The training of the self-employed is also low.

Access to finance

The ability of construction sector companies to access the right type of financing is essential to operate and grow. Evidence shows that SMEs in the construction sector face greater difficulties than other SMEs in accessing finance from banks. This is partly because construction firms are considered to be more at risk due to their low level of fixed capital and smaller firm size. Late payment is a particular problem in the construction industry and small and medium-sized construction companies use trade credit to ensure a smooth cash flow between work and payment. In addition, the design of contracting SMEs are often unaware of financial initiatives and the existing government support programs available to them.

Possibility of innovation

Innovation is essential for the competitiveness, survival and growth of companies. It can lead a competitive advantage, improve efficiency and enable companies to acquire higher value components of the value chain. In particular, the construction industry is seen as having a low level of innovation, as measured by research and development, compared to other sectors. While spending on broader innovation such as design and organizing innovation is two to three times greater than industry spending on tangible assets such as machinery and tools (£ 7.42 billion versus £ 3.15 billion in 2007) 12, the proportion of innovative companies remains low compared to other sectors 13. A literature review shows several reasons for the apparently low level of innovation in construction: (i) a high degree of industry fragmentation and limited cooperation; (ii) procurement affecting the level of cooperation; (iii) suboptimal knowledge transfer and lost learning points; (iv) problems related to market absorption and awareness of the benefits of innovation; and (v) access to finance and innovation aversion to innovation.

Supply chain development

The construction industry has a large supply chain, almost all of which come from within the UK. It is estimated that for every £ 1 spent on construction, at least 90% remains in the UK 14. The sector is highly fragmented. An analysis carried out for BIS by EC Harris (2013) 15 showed that for a 'typical' large construction project - that is, between £ 20 and £ 25 million - the prime contractor can directly manage around 70 sub-contracts, many of which are small - £ 50,000 or less. In the case of a regional project, the size of subcontracting may be even smaller. New findings from the same study identified a number of key factors that determine the successful delivery of a construction project. These include: fair financial arrangements and certainty of payment; early contractor involvement and continued supply chain involvement in project development; strong relationships and cooperation with suppliers and the ability to effectively manage the site, including the ability to react flexibly to change. The study also identified performance opportunities

Proposal

Despite the unprecedented challenges of the financial and economic crisis In 2008, the UK construction sector continues to be one of the key sectors of the UK economy among the largest construction markets in Europe. Evidence shows that UK design is responding well to some challenges and has the potential to take advantage of significant opportunities global market in the future. The UK has a world-class reputation for professional construction services such as architecture and technology development for construction purposes such as construction information modeling. In addition, the proportion of construction workers with a degree or an equivalent qualification has almost doubled over the last decade and the sector still maintains a trade surplus in construction contracts and, in some cases, professional services such as architecture and quantity measurement. Construction in the UK is well placed to take advantage of the opportunities offered by the world to a low carbon and green construction transition, but there is still a need to ensure investment in innovation and technology as well as enhanced collaboration between business and research institutions to enable the UK to take advantage of this. potential. There is also room for further progress, especially with regard to obvious skills shortages, limited awareness of funding options and existing government support programs, relatively low exports of construction products and materials, and to improve supply chain efficiency. Accompanying Industry The Construction Strategy details government policies and actions, and industry jointly implements solutions to these problems.

1.1 Defining the UK construction sector

The construction sector is a key sector for the UK economy and covers a wide range of products, services and technologies. They may differ in economic terms and generate value that reflects the differences in the use of individual factors of production (raw materials, physical capital, intangible investments, skilled and unskilled labor, and knowledge) and the value they generate. For the purposes of this publication, the construction sector is defined as: (i) construction contract industry; (ii) providing professional construction services; and (iii) construction-related products and materials The definition does not include the distribution and sale of construction products. Information on SIC codes can be found in the used appendix. Figure 1.1 provides more information on the type of activities and products by sub-sector and their size in terms of gross value added (GVA) and employment.Note that gross value added in construction contracts is calculated here as follows: £ 69.5 billion ( Total Gross Value Added on ABS for Contracts) less than £ 6.9 billion (SIC 41.1 development of construction projects), totaling £ 62.6 billion.

Figure 1.1: Composition of the UK construction sector - see original document

• Construction of buildings, eg commercial, residential, • Civil engineering, eg. Roads, tunnels, bridges, utilities • Specialized construction works, eg. Electrical and plumbing, demolition and site preparation, plastering, painting, roofing, etc. • Activities in in the field of architecture and quantitative measurements • Wholesale of wood, construction and materials • Wholesale of equipment, plumbing and heating equipment • Rental and lease of construction equipment, etc. • Production of construction products and materials: • Eg Bricks, tiles, cement, concrete products and plaster • Metal structures, metal doors and windows, carpentry and woodwork etc. • Electrical appliances, electric lighting devices etc. Contracts 2,030,000 jobs 234,000 companies GBP 63 billion gross Services 580,000 jobs 30,000 companies GBP 14 billion gross Products 310,000 jobs 18,000 companies £ 13bn gross Source: GVA and no. companies: Annual ONS Business Survey (preliminary results 2011). Employment: BIS microdata analysis from the ONS Labor Force Survey (January and March 2013 data). The construction sector therefore comprises various industries. A complete list as currently defined in the 2007 Industry Statistical Classification (SIC) Code System for Industry Statistics is included in the Annex. Where possible, the purpose of this publication is to analyze to provide statistics for the wider construction sector. However, due to data limitations, this is not always possible and therefore the analysis may only refer to specific subsectors.

1.2 Impact of construction on the UK economy

Construction is one of the largest sectors of the British economy. It contributes nearly £ 90 billion to the UK economy (or 6.7%) 20 of value added, represents more than 280,000 companies 21, accounting for around 2.93 million jobs 22, which is around 10% of total UK employment. The contracting industry is the largest sub-sector of the construction sector, accounting for around 70% of the total UK construction added value and almost 70% of jobs in the sector 23. Building products and services, although smaller, are also key to the sector's performance and generate significant economic benefits. In 2011, some Only 16,000 UK firms specializing in architecture and quantitative measurement services accounted for around £ 4.2 billion in gross value added 24. In the product sub-sector, some 3,000 metal fabrication and parts companies generated nearly £ 4 billion in added value in the same year. Construction is also much more important to the economy. It creates, builds and maintains the jobs where businesses operate and thrive, the cost-effective infrastructure to stay connected with the nation, the homes where people live, and the schools and hospitals that provide the vital services that society needs. A modern, competitive and efficient construction industry is essential to Britain's economic prosperity. His contribution is also essential for the UK to meet its obligations under the Climate Change Act and its wider environmental and social responsibilities. However, the construction sector has suffered a disproportionate impact since the 2008 recession. In 2007, the construction sector accounted for 8.9% of the UK GVA, but by 2011 the sector's contribution had fallen to 6.7%. All three subsectors felt a decline 25. ONS data shows that at the beginning of 2012. Construction contracting industry 20 Source: data from the ONS annual business survey, preliminary results for 2011. Data concern (i) construction contract industry; (ii) providing professional construction services; and (iii) construction related products and materials. ABS is preferred as it is the only source with sufficient detail to enable Gross Value Added to be calculated for the wider construction sector and to compare wider construction with other industries. Note that the ONS (2011) national accounts give a gross value added for construction contracts of £ 90 billion so that the power output correction is not recorded by the ABS; you can't calculate a figure for a wider structure from national accounts, but it is likely to be higher. returned to recession for the third time in 5 years 26. However, despite recent production falls, as shown in Figure 1.2, the UK construction industry has generated significant output in the UK economy since the 1950s, which is when comparative data was available.

Figure 1.2: Annual construction output in Great Britain and change from previous year in Great Britain, 1955-2012 - see original document

The decline in production since the pre-2008 recession was mainly due to a decline in private housing and private commercial buildings, which fell by around 40% and 33% respectively since 2007. 27 Infrastructure and public non-residential activity continued to grow after 2007, but the first experienced a sharp decline in infrastructure efficiency in mid-2012 and the public non-residential subsector continued to decline in the second half of 2010 (see Figure 1.3)

Dig. 1.3: Change in production results in contract construction subsectors - see original document

Historically, the construction sector has been a significant growth driver of the economic downturn. However, Oxford Economics forecasts suggest that a recession in construction contracts between European countries is expected to last twice as long as previous recessions due to a combination of factors including problems around access to finance, the impact of austerity measures in the public sector, recent real estate market dynamics and high uncertainty enterprise and household demand 29. The latest forecasts by the Association of Construction Products indicate a 2.1% drop in construction output in 2013. Due to the effects of cuts in public investment, they forecast an increase of 1.9% in 2014 and 3.8% in 2015. Caused by increased activity in the private sector. These forecasts are alien to Experian's latest forecast of a decline of 2.6% in 2013, followed by an increase of 0.8% in 2014 and 3.0% in 2015. It's clear that the industry is still experiencing difficult times, and it may take some time to recover fully

1.3 International comparisons

Globally, the construction sector has been hit hard since the economic and economic crisis of 2008 and is slowing down in many developed economies. Nevertheless, the UK construction industry remains one of the largest in Europe, as measured by employment, number of companies and gross value added 30. Internationally, the UK accounted for almost 16% of the value of construction contracts, added 31 and around 8% of construction companies in the EU-27 in 2010. 32. The United Kingdom also accounted for around 10% of construction workers employed in the EU-27 countries in 2007. 33. British construction companies perform relatively well compared to their European counterparts. According to a recent assessment by Deloitte 34, the UK ranks third in total sales by country. Among them were 13 British companies 50 largest companies (by sales) identified as major players in Europe in 2011, 35 accounting for total sales of approximately EUR 38 billion. They include Balfour Beatty PLC (8th), Carillion PLC (14th), Morgan Sindall PLC (21st) and Kier Group PLC (22nd). Total UK sales in 2011 remained at the previous year's level. UK groups also reported above-average market capitalization compared to other European countries. At the same time, the UK construction industry has a large number of private business owners and is believed to be more fragmented than its main competitors such as Germany or France 36. The high fragmentation is likely to be caused by the relatively high proportion of self employment in the UK construction industry 37 and the relatively high number of small and micro enterprises. Subcontracting is also common as most construction projects cannot be efficiently completed without some degree of subcontracting. However, the evidence suggests that the particularity of the higher level of subcontracting and greater competition at all levels is the UK construction market 3

2.1 Change in global demand

In the last five years, there have been dramatic changes in the internet construction market. Companies from many parts of the world have faced unprecedented challenges due to multiple factors. These included rising commodity prices, limited financing availability, corporate failures due to mismanagement of risk, cuts in government spending, and declining expenditure consumption coupled with new accounting standards and regulatory requirements 39. Such factors influenced the functioning of construction companies today. Moreover, over the medium term, demand is likely to be influenced by a number of overarching construction factors and further transform the construction sector. The global construction market is expected to grow by 4.3% annually; from USD 8,663 billion in 2012 to USD 15,030 billion in 2025. This is an increase of over 70% 40.

Globalization: A key feature of the latest phase of globalization has been its application to the production value chain. As a result of the improvement of global transport infrastructure, advances in information and communication technologies and significant advances in eliminating tariff and non-tariff barriers, enterprises can now split different parts of the production value chain and conduct specific economic activities in different geographic locations around the world.

Demographic change: Demographic change is also driving demand in the sector. Demographic aging and changes in the overall health of the population have an impact on the provision of healthcare facilities, housing, education and infrastructure. The increased life expectancy and health of the elderly affect the need for hospitals and nursing homes, and therefore their construction, repair and maintenance. Demographic aging also affects the construction sector's workforce and the supply of skills in the sector. Key skills can be lost through retirement and there is a need to inspire and attract younger workers to the industry to replace lost skills

Demand: As the construction sector comprises many different sub-sectors, including civil engineering, manufacturing engineering and housing construction, consumer preferences vary widely across the sector. Overall, greater consumer uncertainty and limited credit conditions since 2008 have reduced consumer demand for a range of design products. However, over the past 20 years, interest has grown in real estate developments in the UK and around the world, with more and more demands from builders, including energy efficiency and high-quality finishes. The preference between urban and rural housing for home ownership compared to housing rental also has a significant impact on the requirements of sector 42.

Green and Sustainable Construction: The global green and sustainable construction industry is projected to grow at an annual rate of 22.8% from now to 201743 as a result of increasing numbers of low-carbon regulations and higher public demand for greener products. The market seems to recognize these opportunities. According to the latest research by McGraw-Hill Budownictwo (2013) 44, about half of architects, engineers, contractors, building owners and construction consultants worldwide predict that at least 60% of their work will be green by 2015, compared with 28% of companies in 2012 and only 13% in 2009. As the world's sixth largest low-carbon market 45, the UK is well placed to seize these opportunities. There are also green building opportunities in the UK market. The United Kingdom has a housing stock that accounts for more than half of greenhouse gas emissions from buildings. The environment offers growth and development opportunities for low-carbon and British fuels a sustainable construction market 46. The government's flagship policy in this area is Green Deal 47, which helps homes and businesses cover some of their energy costs by improving efficiency through savings on fuel bills. There is also room to improve the performance of the construction sector more energy efficient. In this respect, the UK construction industry is backed by Climate Change Agreements (CCA), a scheme that allows eligible energy-intensive businesses to receive up to a 90% discount on the Climate Tax (CCL) in return to improve energy efficiency 48. The use of research in green and sustainable construction, combined with the increased focus on retrofitting existing buildings 49, will be key if the UK construction sector is to play its part in meeting the ambitious emissions reduction targets.

Off-site construction: Off-site construction refers to structures built elsewhere than on site. Research shows that suitable construction methods outside the city jscem construction sites can minimize waste and provide high-quality architecture while reducing costs 50. These findings were supported by a recent review by Cambridge and Oxford Brookes Universities (2013) 51. Outdoor structures have significant potential performance advantages over traditional structures, especially in terms of on-site construction speed, quality, sustainability (energy consumption and lifetime carbon footprint), health and safety and waste reduction. Off-site construction also reduces working capital requirements from developers or contractors (and handing them over to a supplier) can help solve the growing demand for housing. Yet despite the potential benefits, the off-site supply chain is a relatively immature industry both in the UK and largely the world 52.

Emerging Markets: Emerging markets, especially Brazil and China, are expected to continue to experience transformative shifts in economic performance compared to developed economies, led by countries such as China and Brazil. While developed economies can have significant demands in areas such as utilities provision and infrastructure renewal, the prime growth countries are likely to be those where commercial development and big-ticket infrastructure opportunities emerge 53. In 2020, emerging economies are expected to account for 55% of all construction spending 54. Research also suggests that the entire Asian market could increase its global market share from 31% in 2015 to around 46% in 2020

2.2 Possibility to export construction from Great Britain

Research shows that exporting firms tend to be larger, more productive, higher absorption capacity ("know-how") and more likely to engage in R&D or a wider innovation activity than non-exporting firms 56. The evidence shows that only a relatively small proportion of UK construction companies are exporters compared to other UK sectors. In 2012, approximately 6% of SMEs in the construction sector were exported 57. However, those companies that export tend to innovate more. According to the British Community Innovation Survey (2011), around 60% of construction contracts were exporters also involved in some form of innovation activity in 2010, sol 58. The UK construction sector has a good reputation for building services such as architecture and the development of advanced construction technologies such as Building Information Modeling (BIM), which allows companies to make more intelligent use of data, thus minimizing losses from construction processes. This is bolstered by the relatively high number of UK construction patents. Data collected between 2008 and 2012 on patents registered in construction 59 shows that the UK has a technological advantage and specializes in construction research (see Figure 2.1) 60.

Dig. 2.1: Relative technological advantage in construction, 2008-2012 - see original document

Despite the technological opportunities, the UK construction export picture varies between sub-sectors. Over time, UK exports from construction contracts increased in 2011. They were equivalent to around £ 1.65 billion and the trade surplus was around £ 590 million (see Figure 2.2). The UK is also strong in the export of architecture and surveying services, with a trade surplus of around £ 530 million in 2011 (see Figure 2.3).

Figure 2.2: Trade in construction contracts in Great Britain - see original document

On the other hand, the UK trade performance for construction related products is less positive. Figure 2.4 shows that the UK still has a trade deficit in construction materials and components (around £ 6.2bn in 2012). Four of the UK's five largest construction exports subsectors had a trade deficit in 2012, the largest being the trade deficit for the electrical wiring subsector (£ 860m), followed by lamps and fittings (£ 310m), air conditioning equipment (270 million pounds) and plugs and sockets (120 million pounds). On the other hand, the paints and varnishes sub-sector had a trade surplus of around £ 120 million in the same year 61.

Figure 2.4: UK Building Materials and Component Trade - see original document

Despite the technological possibilities, a large number of construction patents compared to many other countries, and a trade surplus in construction contracting and selected construction services, the UK has not yet specialized in construction exports. Overall, UK exports of construction 62 represent less than 2% of all total UK exports 63, and the UK is not considered to have a relative comparative advantage in terms of exports of construction contracts; other countries have higher construction exports in relation to the total export volume 64. While it is difficult to judge exactly why other countries are more specialized in construction, it is likely to be driven by larger company size, higher cooperation and better awareness of the benefits of exporting between other countries over the UK.

2.3 Export barriers and future strategic challenges

When deciding to enter overseas markets, construction companies, as in other sectors, may not have enough information to enable them to make an informed decision. They may not be fully aware of the potential benefits of exporting and lack the necessary knowledge, capabilities or products to successfully exploit overseas markets. They may also lack key management skills or resources. This may cause some firms to choose not to export or engage in export activities at a lower level than they would otherwise undertake 65. British construction companies tend to be smaller and less collaborative, which can make it difficult to access overseas markets. Table 2.1 lists the most common reasons for non-export cited by small and medium-sized construction companies.

Table 2.1: Reasons given by UK construction SMEs for not exporting - see original document

Construction companies operate in a sector with an increasing level of health and safety regulation due to sustainability and carbon emissions requirements, which also need to be met by increasing global competition. Meeting these requirements requires a high level of capabilities and management skills, which pose further challenges for construction companies. The UK construction sector is well placed to meet the challenges of the medium term. Many employers have shown readiness and readiness to comply with various environmental conditions and sustainability requirements, and many British companies have won international contracts and participated in international cooperation. The role of higher skills and management opportunities are key for the construction sector to seize opportunities and address obvious challenges A construction engineering review 67 found that while some UK-based companies are seizing business opportunities abroad, there is evidence that cultural linguistic differences can constitute significant barriers for British companies wishing to win to work in other EU countries. The review found little evidence that there were significant differences between craft skills in the UK and elsewhere. However, the skills required for international competition are considered to be more diverse than those required for purely domestic business 68. In order to successfully compete in the global economy and take advantage of global opportunities in, for example, green building, UK construction companies will need to make further efforts to distinguish themselves from lower cost countries, including China, India and Brazil, which are gradually shifting to higher value activities. This means that UK construction companies will have to keep innovating: developing and bringing to market new and more advanced building processes and materials and adapting their business models in ways that add value to their construction products and services provide. By responding quickly to new opportunities created by anticipated changes in global demand, UK construction companies can take advantage of the first-player advantage to increase their chances of winning a larger share of the global construction market. At the same time, many UK construction companies will have to become more internationalized. By engaging in international markets, UK construction companies can gain greater exposure to new ideas and knowledge, as well as access to customers, suppliers and skills from around the world. This would keep them at the forefront of the continuous development of innovation and technology. While access to overseas markets and increased export activity are one of the drivers of growth, there are also other key factors that can enable the construction sector to successfully grow and transform in the light of increasing globalization, competition and demand. They are discussed in the next chapter.

The construction sector is influencing growth, competitiveness and performance in many different ways. The purpose of this chapter is to assess key growth opportunities that will be of paramount importance as the construction industry continues to grow and become increasingly important with the advantage of global market opportunities both now and in the long term. These activating elements are: people and skills; access to finance; supply chain innovation and opportunities. The complex and interrelated nature of these factors means that their isolation cannot be assessed. The right combination of these factors will help to ensure the future success of the UK construction sector.

3.1 People and skills

The changing nature of the construction market coupled with increasing demand for low carbon and energy efficient construction, greater off-site production capacity and technology deployment mean that a skilled and flexible workforce will be essential in the UK for the future performance and competitiveness of the sector construction. Sector changes in skills needs are particularly relevant for management and occupational occupations, with increasing demand for higher-level skills 69.

Job vacancies: Despite the high number of layoffs, low vacancy rates and the high mobility of 70 construction workers, reports continue to emerge of some serious skills shortages in the UK construction sector. About one fifth of all vacancies in the broadly understood construction sector are permanent and difficult to fill, as employers cannot recruit workers with the appropriate skills, qualifications and experience qualifications 71. These shortages are mainly visible in the skilled industries and professional occupations. More than half (53%) of employers in the construction contracting industry reported skill shortages in occupational or associated occupations and around 28% reported skills shortages in occupational occupations 72. Employers report that these shortages lead to increased costs, delays, inefficiencies and loss of business, and a lack of capacity for people to become more challenging, with an impact on the sector's competitiveness 73.

Qualifications and internships: Recent evidence of qualifications is generally positive and shows a growing percentage of people with higher qualifications. The proportion of workers in construction with diplomas or equivalent qualifications (level 4) has almost doubled compared to the last decade, from around 12% in 2001 to around 22% in 2012. 74. At the same time, the contract industry in construction has a higher proportion of workers with a level 3 qualification than any other sector in the UK 75. The construction sector is an important provider of internships. Employers in the wider construction sector are more likely than usual to offer formal internships: 17% compared with the sector-wide average of 13% 76. At the same time, however, the economic conditions have led to a significant drop in the number of completed apprenticeships in construction related industries: from around 22,000 in 2008/09 to around 16,000 in 2011/12 77 (see Figure 3.1). This is a time when continued practice in other major areas continued to grow. A recent analysis shows that around 86% of employers in the construction sector said they are unlikely to start an internship within the next 12 months 78.

Figure 3.1: Completed internships in Great Britain by main subject area - see original document

Training and development: Training and development activities in the construction sector are low 79 and are likely to be carried out by a large number of self-employed people who often face the 'earn or learn' dilemma. Only 17% of sole proprietorships financed or organized training for themselves or for intermediate staff, compared to 41% of employers in the wider construction sector 80. Self-employed persons are half as likely to participate in training as employees in sector 81. Many companies in the construction industry do not have a fixed training plan. Only about 27% of the broader construction companies said they had a training plan and 19% had a training budget. This compares to an average of around 38% and 29% for companies across all sectors in the UK with ment ing, 82.

Management skills: Management skills are crucial to the performance of the construction sector. The analysis carried out by EC Harris for BIS (2013) 83 on the structure and efficiency of the construction of supply chains demonstrated the central role of efficient and effective management of the workforce on project results. Due to the disaggregated nature of the supply chain design and the one-off nature of projects, there is a high dependency on the effective coordination of activities both o on site and off site by project managers in the supply chain. This ability becomes increasingly important as the supply chain in the construction industry is involved earlier in the project and design teams integrate to a greater degree to improve efficiency and eliminate waste. While EC Harris's research found ample evidence of positive performance highly capable of managing projects and locations, the study also found examples of less effective management at all levels in the supply chain having a negative impact on project outcomes. The study showed that the ability to manage project teams is very high an important factor in enabling successful project outcomes and continuous investment in skill development is essential to ensure continuous improvement in industry performance.

Construction Image: Evidence shows that some parts of the construction sector have an image problem that could keep people from entering the industry. Survey data shows 84 that the overall appeal of the construction industry as a career option for young people is low (averaging 50%) of 4.2 out of 10 among people aged 14-19) and only slightly higher among career counselors (5.6 on 10). Parents rate the industry higher, but still at a relatively low level (6.2 out of 10). Construction is also seen as a less attractive career option than a manufacturing and retail engineer (see Table 3.1) 85 and seen as "being outside and getting dirty" and most suited to "young people who do not get into college or university ". The study also found that construction has a hard time attracting women. The poor image of construction has a detrimental effect on construction firms' ability to recruit and retain people with the right skills, with an analysis showing that the sector has more difficult vacancies to fill than the UK average 86.

Table 3.1: Construction as a career choice compared to other sectors - see original document

3.2 Access to finance

The ability of construction companies to access the right type of financing is essential for them to act and grow. Finance is commonly used to buy fixed assets or to finance an expansion, and is also used to finance working capital needs. This section covers the types of finance commonly used by construction companies and takes into account financial considerations that affect the sector. The focus is on small and medium-sized enterprises (SMEs) as they make up 99.9% of UK construction companies 87 and more are likely to face financial difficulties than larger companies due to the narrower range of financial options available 88.

loan: Bank loans are a common form of financing sought by small and medium-sized construction companies. Out of those employers from the SME sector who applied for financing in the previous 12 months, 36% were looking for a bank loan and 53% were looking for an overdraft 89. However, bank lending to the construction contract sector declined both in absolute terms and relative to other sectors during the recession - from around £ 32.2bn in early 2009 to £ 19.9bn in December 2012. 90. This is equivalent to a reduction of 38% and compares with a decrease of less than 5% on average across all sectors in the UK.

Dig. 3.2: Bank loans for subsectors ordering construction - see original document

Recent developments in bank lending vary by sub-sector of construction contracts (see Figure 3.2 above). The biggest change in lending was in the construction of the residential building subsector, dominated by smaller companies working for natural persons, tenant owners and working locally for domestic housing developers. A significant decrease was also observed in the sub-sector of other construction activities, i.e. dominated by industry subcontractors working for the main contractors. On the other hand, lending to the civil engineering sub-sector and commercial construction, buildings, which are mainly composed of larger contractors, have been relatively stable since 2011. SMEs in the construction contracting industry are less successful than SMEs in other sectors, on average when applying for loans in current account (59% compared to 71% in total) and loans (44% compared to 59% in total) 91. A quarter of the construction companies surveyed said they lost business or abandoned development plans because they were unable to raise the necessary funds 92.

Trade credit: Trade credit covers companies that delay their payment for a fixed period, such as 60 days, and plays a particularly important role in the construction sector. Companies that receive a trade credit often get a discount if they can pay for the goods in less time. Trade credit is more important when concluding contracts in construction companies than to other sectors. In the Small Business Survey 2010, employers from the SME sector were asked whether they had granted or received a loan. It showed that 100% of respondents from SMEs in the construction sector reported that they provided a trade credit and 89% said they had received a loan. This is much more than the other 93 sectors. The results also indicate that trade credit plays a more important role in financing construction firms than in other sectors. About 47% of all companies that received a trade loan found it very important for the company's development 94. About 68% of companies applied for construction when contracting. According to a CBI report (2010) 95, trade credits are likely to be more important than bank credits, as more and more SMEs think and act like lenders. However, many SMEs lack a tool for good credit risk management. This suggests that the importance and implications of trade credits are often overlooked. A recent study commissioned by BIS and conducted by University College London (2013) 96 assessed the availability of trade credit for UK construction companies and analyzed their dependence on credit to supply construction production. The key findings are summarized in Box 3.1 below. Research conducted for BIS on the role of trade credit in company construction contracts shows that in construction, trade credit is by far the most important and widespread source of financing operations, while short-term bank financing is a target used by some companies for some time (at any time most construction companies have no short-term bank debt). 97 firms in the construction industry use two to three times more trade credit than firms in the rest of the economy. The credit received from the supplier is equal to 32% of the total assets of the construction contractors (24% of the assets for small and medium-sized construction companies) compared to 11% in the rest of the economy. The trade credit provided by contractors represents 20% of the contractor's total construction assets (21% for small and medium-sized construction companies) compared with 8% for the rest of the economy. Looking at the differences between tier 1 (prime contractor) and tier 2 contractors 98, it shows that tier 2 firms are net suppliers of trade credit, meaning that they grant more trade credit to tier 1 firms than they receive from their own vendors, while tier 1 firms are net buyers of trade credit, that is, they receive more vendor trade credit (including tier 2 firms) than they are offering to construction clients. While (non-micro) tier 2 firms are large suppliers of trade credit to tier 1 firms, however, the price they receive for it in terms of higher margins appears to offset the costs against the terms of lower turnover on £ capital employed. That's why there is no "free lunch". The study showed that SMEs face certain limitations in the amount of trade credit, suppliers are willing to allow them to do so. In the 2008 Finance and Banking Crisis, studies show that in the case of construction contractors taking out a bank loan, relative importance and trade credit gained importance. That is, the construction contractors switched the sources of financing from bank financing to other sources of financing, including trade credit. The study shows that trade credit plays a significant role on construction contractors' balance sheets, with lower tier contractors receiving trade credit from outside firms, allowing them to continue extending trade credit to contractors up the supply chain and ultimately to the customer. The cascading nature of this lending trade suggests that if lower tier counterparties experience problems accessing trade credit, the entire supply chain may be affected. Therefore, it is important to monitor your trade credit, especially at level 2.

Other types of financing: There are also other financing options available for small and medium sized construction companies which include asset based financing, personal funds or equity financing. Although they are used less frequently in construction, they also play a role in financing construction activities. Factoring and invoice discounting are the two main types of asset-based financing. they involve financing that is secured against unpaid invoices, which enables companies to receive payments much faster than otherwise, helping to smooth the cash flow for businesses. ABFA, a body representing the asset-based financial industry, reports that the use of invoice financing is increasing, although only 4% of construction companies were seeking financing in this form of financing in the last 12 months (compared to 6% of all respondents) 99. Construction industry companies (27% of respondents) were more More likely than all respondents (24%) felt they had to inject personal funds instead of choosing do it 100. This may be due to the fact that construction companies experience greater difficulties in accessing finance. In return, equity financing enables a share capital increase from outside investors to transfer a portion of the business and can be obtained from venture capital (VC) investors, business angels and friends or family. Only a small minority of SMEs as a whole (around 3%) have sought equity financing, and this is even smaller for construction companies (around 1%) 101. Many SMEs may not have sufficient resources or expertise to seek equity financing.

Barriers to accessing finance: Access to finance is one of the constraints on growth typically mentioned by construction firm 102. The Small Business Survey (2012) showed that 13% of the construction contract SME employers cited cash flow as the biggest obstacle to their company's success, higher than 10% of all SME employers. It is likely that there will be difficulties in accessing finance due to the combination of the supply and the demand side of physicians: (i) supply factors - risk and uncertainty Banks consider construction companies to be high risk compared to other sectors. Reasons for this may include a low level of fixed assets / assets and a smaller than average company size compared to other industries. The SME Financial Monitoring Study collected external risk assessments for the companies covered by the study. For all small and medium-sized enterprises within the company's highest risk rating, it was significantly less effective in obtaining a loan or overdraft facility for buildings. Out of the nine sectors taken into account, enterprises from the construction industry had: the second largest percentage of companies with the highest risk category 103. As it can be difficult for lenders to distinguish between high risk and low risk companies, banks may therefore rely on companies' financial performance or collateral to make decisions rather than the economic viability of the company. This can be a particular problem as lenders become more risk averse due to uncertain economic conditions 104. (ii) Demand-side factors - lack of skills or awareness of financing options Small and medium-sized enterprises in the construction contracting sector are less aware of the initiatives available to them and are less likely to seek financial advice than SMEs in other sectors. For example, only 19% of SMEs in the construction sector were aware of government support schemes such as the Enterprise Finance Guarantee Scheme, compared to 24% of all SMEs 105. The SME Finance Monitor survey also found that 1 in 10 SMEs in the construction industry asked for advice when applying for loans, compared to 1 in 3 in some other sectors. In addition, construction companies may not have sufficient financial skills to apply successfully for banks or other types of financing and to demonstrate that their project is a profitable investment opportunity. Investments-ready firms (ie, meeting relevant management standards, able to demonstrate and communicate management information to investors or lenders and have no idea of ​​third party controls) are likely to be successful in accessing external financing. Finally, late payment is also a key obstacle for construction SMEs. Contractors in the construction industry are often not paid for their work until it is done. It is not unusual for downstream supply chain members to wait up to 100 days to receive 106 payment. This harms the company's cash flow and often requires relying on loans to pay for materials and labor. According to the Construction Trade Survey 107, late payment is the most important problem affecting construction companies - only 5% of specialist contractors are paid within 30 days. The Small Business Survey (2012) also found that late payment is a particular issue for small and medium-sized construction companies compared to other sectors. About 33% of Construction contracts employers from the SME sector state that clients pay them later than they require them to be a big problem in normal business conditions. This compares with 19% of all employers. SMEs consider late payment to be a major problem.

3.3 Ability to innovate

Innovation - often defined as the successful use of knowledge and new ideas to create new or improved products, processes and organizational structures - is essential for companies to compete, survive and grow. Driving or adapting to rapidly changing technology can increase competitive advantage, improve productivity and enable companies to capture higher-value components in the value chain. Traditionally, innovation has been measured by R&D expenditure or patents granted, but broader innovation can also be measured by corporate expenditure on training and skills development, software, advertising and market research, or spending on other improvements to an organizational design or processes.

Traditional forms of innovation: The UK has a strong reputation for world-class research. However, the results are relatively low on traditional measures of innovation such as R&D expenditure compared to the main competitors 108. In particular, the construction sector has a low level of innovation as measured by R&D compared to other sectors. Research and Development Expenditure by UK Construction Firms are low compared to other European countries, however, there are differences in the composition of large contracting companies between the UK and those in Europe. The construction contract recorded £ 22 million of R&D spending in 2011 110, one of the lowest of all sectors and also declining since 2000. This contrasts with an average R&D expenditure of 35% across all sectors in the UK since 2000 and average spending in the UK sector is over £ 500 million 111. Low R & D levels recorded in official statistics may be due to two reasons: (i) measurement and classification errors - companies are doing R&D but not fully implemented accounted for 112 or are innovative but not through formal R&D; and / or (ii) the levels of innovation are indeed suboptimal due to persistent barriers to store innovation.

Broader innovation: But innovation is about more than just R&D spending. Construction contractors invest two to three times more in intangible assets such as design and organizational innovation than in tangible assets such as tools and machinery 113 The UK construction contracting sector has invested £ 3.15 billion in tangible fixed assets and £ 7.42 billion of intangible assets in 2007. Much of the total intangible investment was in skills training and improvement, design and organizational improvements (see Figure 3.3).

Figure 3.3: Breakdown of Intangible Investments in Construction in UK 2007 expenses - see original document

NESTA and the Community Innovation Survey, with broader definitions of innovation, paint a different picture of the sector, pointing to the much more innovation activity involved. However, the percentage of companies introducing innovations is still low compared to other sectors. Of the surveyed companies, only about 35% of self-employment in construction was declared to be broader innovators in 2010. The proportion was slightly higher in construction related service companies (around 37%) and much higher for construction manufacturers' products and materials (around 49%) Innovation can be driven by market forces (firms innovate to survive competitive pressure or innovate to take advantage of market opportunities) or by regulation (firms must innovate to be compliant). Figure 3.4 shows that while the most common reason for innovation among construction contract firms and related professional services is to improve product or service quality, around a quarter of firms in both subsectors innovate to meet regulatory requirements. However, while improving health and safety and growing market share are the next most common reasons to lead a contractor innovation, more important drivers of construction services companies are to enter new markets to increase market share and broaden the product range.

Figure 3.4: Reported main drivers of innovation among wider innovators in construction - see original document

Barriers to innovation: Figure 3.5 shows a comparison of the reasons given by the surveyed companies in the construction industry. More than a quarter of construction contractors do not innovate because they believe that this is not the case, given the current market conditions. About 40% of non-innovative architecture and engineering companies and 32% of surveyed construction companies attributed market barriers to their lack of innovation. A literature study seems to point to several reasons for the apparently low levels of innovation in construction: (i) a high degree of industry fragmentation and limited collaboration; (ii) procurement affecting the level of cooperation; (iii) sub-optimal knowledge transfer and lost learning points; (iv) market absorption and awareness problems are benefiting from innovation; and (v) limited access to finance and risk aversion innovation.

Figure 3.5: Reasons for the lack of innovation in all surveyed companies in the construction industry subsectors in 2010 - see original document

From the perspective of those who innovate, the barriers they see as affecting most of them are economic factors, in particular the cost and availability of financing, and the uncertain demand for innovative products 115. The impact of this on innovation levels is unknown, so it is so difficult to pinpoint the scope of innovation that could occur in the absence of these barriers. There are three general reasons why the market may not provide a sufficient incentive for innovative firms: external justification: firms are unable to obtain all the returns from their innovation, reducing the benefits of innovation; coordination errors as agents are unable to work together towards a common goal; and information failures where differences in information available to interested parties are prevented, transactions take place and knowledge transferred

3.4 Supply Chain Development

The construction industry has a large supply chain - around £ 124 billion in intermediate consumption in 2010 - almost all of them come from the UK. In other words, construction spending tends to remain in the UK supply chain. Almost half of them outlays come from the construction industry itself, but they are also large buyers of materials in the form of metals, plastics and mineral products, administrative and support services, and professional services 116. It is estimated that for every £ 1 spent on construction, at least 90% is left in the UK 117. The UK construction sector is highly fragmented. While there are some large companies, at least 99.9% of the companies are SMEs, and of these about 83% employ no more than one person 118. The industry tends to rely heavily on sub-contracts and has a high percentage of self employment, with over 40% of construction outsourcing self-employment 119. This makes the industry as a whole very flexible and responsive to changing market conditions, but a high degree of fragmentation has other consequences. Figure 3.6 shows a simplified view of the supply chain for a typical construction project.

Figure 3.6: Structure supply chain - see original document

An analysis carried out for BIS by EC Harris (2013) 120 showed that for a "typical" large project a construction project could be the main undertaking - i.e. in the £ 20-25 million range, it directly manages around 70 subcontractors, many of which are small - 50 £ 000 or less. In the case of a regional project, the amount of subcontracting may be even smaller - with examples of projects where 70% of subcontractors were below £ 10,000. This is clear evidence of the scale of fragmentation in the industry and a real demonstration of the challenge of building integrated supply chains with a focus on end product and customer value. Regardless of the industry structure, the study found abundant evidence of the effectiveness of the framework's use, early involvement of contractors in projects, and high levels of collaboration between supply chain members on projects. The study also found evidence of the impact of the downturn on the supply chain as well as the current pressures on well-established relationships as a result of increased competitive pressure. New findings from the same study identified a number of key factors that determine the successful delivery of a construction project. These include: fair financial arrangements and certainty of payment; early contractor involvement and continued supply chain involvement in project development; strong relationships and cooperation with suppliers; and the ability to effectively manage the site, including the ability to react flexibly to change. The study also identified performance improvement opportunities related to sourcing large numbers of small deals; coordinating multiple transactions - especially at the later stages of the project and further improving collaboration, design and site management. One of the key research findings is that the industry has a low awareness of the sources of waste and duplication that are embedded in current construction practice. This finding highlights the fact that in order to ensure targeted improvement, many aspects need to be addressed at all levels of the supply chain.

List of SICs included in the 'large construction' sector: The international definition of construction in the SIC codes (2007) is 41, 42 and 43. Although the definition includes contracting, it does not include construction related services and products. For example, engineering activities and related technical consultancy (71.1), and Manufacture of bricks, tiles and construction products from fired clay (23.32) are not included. For the purposes of this analysis, we used the broader definition of the construction sector wherever data availability would allow us to do so. However, it should be noted that there will be some services and products that are excluded, for example steel production. This is because it is not possible to determine what proportion of the steel is used specifically for construction purposes and in other sectors such as automotive and aerospace. In extracting the main statistics, the following SIC codes were used to define the broader construction sector.

PURCHASER

41 Construction of buildings

41.1 Development of construction projects (excluded from statistics)

41.10 Development of construction projects

41.2 Construction of residential and non-residential buildings

41.20 Construction of residential and non-residential buildings

41.20 / 1 Construction of commercial facilities

41.20 / 2 Construction of residential buildings

42 Civil engineering

42.1 Road and rail construction

42.11 Construction of roads and highways

42.12 Construction of railways and underground railways

42.13 Construction of bridges and tunnels

42.2 Construction of public utility projects

42.21 Construction of fluid utilities projects

42.22 Construction of utilities for electricity and telecommunications

42.9 Construction of other engineering projects

42.91 Construction of water projects

42.99 Construction of other engineering projects, not elsewhere classified

43 Specialized construction work

43.1 Demolition and site preparation

43.11 Dismantling

43.12 Site preparation

43.13 Trial drilling and boring

43.2 Activities in the field of electrical, plumbing and other construction installations

43.21 Electrical installation

43.22 Plumbing, heat and air conditioning installations

43.29 Other construction installations

43.3 Completion of construction and finishing

43.31 Plastering

43.32 Installation of woodwork

43.33 Floor and wall coverings

43.34 Painting and glazing

43.34 / 1 Painting

43.34 / 2 Glazing

43.39 Other finishing and finishing works

43.9 Other specialized construction activities

43.91 Roofing activities

43.99 Other specialized construction works, not elsewhere classified

43.99 / 1 Installation of scaffolding

43.99 / 9 Specialized construction work (other than scaffolding assembly) not elsewhere classified

SERVICES

46.13 Agents involved in the sale of timber and building materials

46.73 Wholesale of wood, construction and materials, and sanitary equipment

46.74 Wholesale of computer hardware, plumbing and heating equipment and consumables

77.32 Renting and leasing of construction and engineering machinery and equipment

71.11 Architectural activities

74.90 / 2 Quantitative measurements

PRODUCTS

08.11 Quarrying of decorative and construction stone, limestone, gypsum, chalk and slate

08.12 Operation of gravel and sand pits; mining clay and kaolin

09.9 Support measures for other miners and mines

16.1 Sawmill and wood planing

16.21 Manufacture of veneer sheets and wood-based panels

16.22 Manufacture of assembled parquet

16.23 Manufacture of other carpentry and carpentry products

22.23 Manufacture of plastic products for construction

23.11 Manufacture of flat glass

23.12 Shaping and processing of flat glass

23.31 Manufacture of ceramic tiles and flags

23.32 Manufacture of bricks, tiles and construction products, in baked clay

23.42 Manufacture of ceramic sanitary fittings

23.51 Manufacture of cement

23.52 Manufacture of lime and plaster

23.61 Manufacture of concrete products for construction purposes

23.62 Manufacture of gypsum products for construction purposes

23.63 Production of concrete mass

23.64 Manufacture of mortars

23.65 Manufacture of fiber cement

23.69 Manufacture of other articles of concrete, plaster and cement

23.7 Cutting, shaping and finishing of stone

23.99 Manufacture of other non-metallic mineral products not elsewhere classified

25.11 Manufacture of metal structures and their parts

25.12 Manufacture of metal doors and windows

25.21 Manufacture of central heating radiators and boilers

25.72 Manufacture of locks and hinges

27.33 Manufacture of electrical equipment

27.4 Manufacture of electric lighting equipment

28.14 Manufacture of other valves and valves

28.25 Manufacture of domestic refrigeration and ventilation equipment

33.11 Repair of fabricated metal products

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