Cutting corners now could risk future performance and viability - Turner & Townsend

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A new report from Turner & Townsend has outlined the "incredibly complex landscape" construction and the built environment is facing, with rising interest rates and high inflation dominating news headlines and resulting in declining demand for the sector.

However, the firm is warning against "short-term thinking" amongst businesses in the industry, as this could derail "vital long-term strategic priorities".

In its Autumn 2023 UK Market Intelligence Report, Turner & Townsend is calling for clients to take a strategic approach that will also ensure long-term business benefits.  

This includes prioritising sustainability commitments to protect project viability and future profitability.

This is despite the fact the firm recognises businesses are facing increased insolvency risk from inflation, slowing demand and the climate crisis.

Martin Sudweeks, UK managing director of cost management at Turner & Townsend, said: “Our industry is currently managing an incredibly complex landscape as we experience both softening demand and the continued input cost inflation.  

"This is driven in large part by an endemic skills shortage that is pushing up labour costs – the sector must work with government and education bodies to tackle the jobs market crunch."

He added in the face of immediate cost challenges, it may appear an attractive option for clients to dedicate their efforts to firefighting the issues of ‘today’, while losing sight of commitments to policies like net zero.  

"However, clients should instead be prioritising their long-term strategies, and understanding how profitability, project performance and sustainability can be complementary goals," he said.  

"By doing this, clients will be able to achieve both short-term stability and future, strategic success.”

Turner and Townsend's Autumn 2023 UK Market Intelligence Report does underline the "perfect storm of challenges" the sector faces – from declining demand and interest rate hikes to persistently high material and labour costs - and acknowledges the need for clients to tackle these in the short term.  

It states that despite falling demand, tender price inflation forecasts remain stubbornly high, and unchanged from the summer report.  

Real estate forecasts are 3.7% and 2.7% for 2023 and 2024, respectively, and 5.5% and 4.5% for infrastructure.  

More concerningly, total construction new orders have been declining, settling below pre-pandemic levels by 10.9%.  

The deflationary pressure that might be expected from this slowing demand is being offset by higher borrowing costs, labour shortages, and high material costs, which stand 42.3% above February 2020 levels.

Whilst demand in the real estate sector as a whole slows, by sub-sector the landscape is more mixed.  

Non-housing repairs and maintenance continues as a growth sector, which was up by 2.7% in the last quarter.  

In contrast, private housing and private repair and maintenance performed poorly, down by 3.3% and 1.3%, respectively, reflecting high borrowing costs and tight household budgets.

In infrastructure, the impacts are being felt from the projects rescheduled due to the prolonged inflationary pressure, and a wider cooling of work pipelines, especially in rail and road sectors.  

However, pockets of increased investment in other sub-sectors are providing balance.  

The water sector is buoyant, with the upcoming start of the new asset management plan period (AMP8), and energy remains strong as the government invests in shoring up the UK’s power supply.

The report acknowledges that clients are becoming more risk-averse as they battle external headwinds and navigate supply-chain insolvencies.  

However, Turner & Townsend advises clients to act now to strengthen their long-term strategic approaches.  

One key area to protect is sustainability, as energy efficiency and carbon reporting become increasingly important for long-term compliance, attracting investment, and avoiding ‘stranded assets’ in client portfolios.  

The organisation stands firm that by putting the right procurement strategies in place, enhancing project controls and focusing on robust programme management, clients will be able to achieve greater value over the long term.

Read the full report.

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