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2.0 The Business and Economic Environment

2.0 The Business and Economic Environment

2.1 The Construction Industry

Generating about 8% of the UK’s economic output and employing over 2 million workers in a diverse range of occupations, construction is one of the UK’s largest industries and is an essential prerequisite for all other economic activity. Combined employment of construction workers and professionals accounts for 8% of the UK workforce.

Total employment within the ConstructionSkills’ footprint consists of 1.7 million who work in construction and contracting (SIC 45 excluding SIC 45.31 and SIC45.33) together with a further 326,000 who are employed in the Professional Services sector (SIC 74.20).

The majority of employees across the UK (i.e. those in direct employment) for both contractors and professionals work within mid-sized (10-250 employees) companies. However, most companies in both categories are small, with roughly 90% employing less than 10 employees. Furthermore, 767,000 people working within the ConstructionSkills’ footprint are self-employed, representing over a third (38%) of the available labour in the contracting sector.

Figure 1 Employment within ConstructionSkills’ Footprint, United Kingdom: 2005

Size of Enterprise

(Number of Employees)

Enterprises

Employment

Number

Percent

Number

Percent

With no employees

767,090

86

767,090

38

1-9

103,810

12

391,045

19

10-49

13,785

2

293,285

14

50-249

1,835

0

183,440

9

250+

340

0.04

394,340

19

Total

886,860

100

2,029,200

100

Source: Small Business Service Analytical Unit 2005; Office for National Statistics, Labour Force Survey 2005; ConstructionSkills

Note: "With no employees" comprises sole proprietorships and partnerships comprising only the self-employed, owner-manager(s), and companies comprising only an employee director.

However, self-employment in the four main craft trades (wood trades, bricklaying, plastering and painting & decorating) accounts for over 60% of their total employment across the UK. By comparison self-employment within the Professional Services sector is less widespread, accounting for about a quarter (27%) of the workforce and being very much focussed around the activities of architects and chartered surveyors.

Figure 2 Employment status within ConstructionSkills’ Footprint, United Kingdom: 2005

Source: Office for National Statistics, Labour Force Survey 2005

In terms of occupational structure, manual workers dominate, representing 60% of the total workforce. The remaining 40% are non-manual workers, including managers, and all those working in the Professional Services sector.

Figure 3 Employment by Occupation, United Kingdom: 2005

Source: Office for National Statistics, Labour Force Survey 2005; Construction Skills Network Model; Experian

Notes: Professional Services (SIC 74.2) consists Architects, Quantity Surveyors, Consulting and Design Engineers and Planners. Engineering, IT and other professionals refers to those working for building contractors, as defined by SIC 45. Non construction Workers refers to those working in construction (as defined by SIC 45 & SIC 74.2)

2.2 Construction Economic Activity

Construction output has been experiencing its longest period of sustained growth since the post war construction boom and remained steady in 2005 despite low growth forecasts in the wider economy. Whilst reflecting a broadly similar pattern to 2004 at year-end, contractors output stood at £81.5bn, reflecting a fall of around half a percent on the previous year, the first such fall since 1994. It is estimated that the output of construction Professional Services firms generate an additional output which, based on projections of the latest available data is likely to be in the region of £17 billion - making construction overall a £100 billion sector.

Figure 4 Construction Output (Constant 2000 Prices) and Employment, United Kingdom: 1984-2005

Source: Department of Trade and Industry (DTI), Department of Finance and Personnel Northern Ireland (DFPNI); Experian

Much of the activity in 2005 was sustained by the Repair and Maintenance (R&M) market, particularly Public Non-residential (up 5%) and Private Non-residential (up 0.5%). New work slowed, falling by 1% compared with 2004, with considerably less output from Public Non-residential (down 9%), Infrastructure (down 7%) and Public Housing (down 5%). The only exceptions to this downward trend in new work were Industrial (up 6%) and Private Housing (up 4%), the former perhaps indicative of the recent reversal in the decline of manufacturing. The Commercial market exhibited some signs of improvement (up 1%), but essentially remained static.

Whilst contracting and building firms work to service all of the types of demand mentioned above, Professional Services firms exhibit a different balance, largely because of their lower level of involvement in the Repair and Maintenance market. The most recent and available research shows that new work accounts for 60% of professionals fee income and refurbishment accounts for 28%. Only 12% of professional fee income is generated in the R&M sector. The significant differences in the patterns of demand created for contracting and Professional Services is under constant scrutiny by ConstructionSkills and is a key element of the work of the Construction Skills Network.

Figure 5 Construction Output (Constant 2000 Prices) by Main Sub-sector, United Kingdom: 2005

Source: Department of Trade and Industry (DTI), Department of Finance and Personnel Northern Ireland (DFPNI), ConstructionSkills

The slight decline in annual output that affected both contractors and professionals was not surprising when set against the political and economic uncertainty that was present throughout much of 2005 (and indeed into 2006). The economic performance of the whole industry was affected by Government investments delivering near the end of term in the first half of the year, the slowing housing market, and a slowdown in consumer spending, and increasing fuel and energy prices during the latter half of the year.

In contrast to the decline in output during 2005, new orders increased throughout the year and were up 7% compared to 2004. This trend has been maintained throughout the first half of 2006 with Government-sponsored work buoying demand. Orders in the twelve months to June 2006 rose by 8% compared with the previous twelve months, and orders in the three months to June 2006 rose by 6% compared to the previous three months, with increases in all sectors except Public Non-housing (excluding Infrastructure) and Private Industrial. The impact of new orders tends to be felt by Professional Services firms early in the process, which will be lagged and reflected by increases in contractors output throughout 2006 and 2007.

The early signs are that Public and Private Housing together with Private Commercial could well drive industry performance in the latter half of 2006. However, Professional Services firms are likely to gain more from the latter, helped by Private Industrial and Infrastructure, which are also showing encouraging but uneven signs of improvement.

In terms of output and new orders the first half of 2006 has exhibited modest signs of improvement reflecting renewed commitment by the Government to improve public services, and a continued confidence in the economy driving corporate investment and consumer spending. Overall the early signs are that 2006 should be a better year for the UK economy than 2005, with healthier consumer demand driving growth and continued recovery in housing market. This is visible in the construction output figures for the second quarter of 2006, which show that total volume of construction output whilst unchanged compared to the previous year increased by 1% in the second quarter of 2006. Also, the value (in current prices) of construction output increased 4% compared to the previous year and increased 1% in the second quarter of 2006.

Industry growth rates for 2005 were somewhat disappointing, but at 3% the forecast rate for 2006 is above the national average predicted for the same period (2.2%). This presents a good scenario for the industry overall.

The industry view is that Government investment should reverse the decline in output experienced in 2005. The Construction Confederation and the Construction Products Association report that building contractors are optimistic about prospects for 2006 and beyond with 30% of firms reporting that output in the second quarter of 2006 was up compared to the first quarter.

The majority of indicators suggest that Government public spending and a strong economy underpinned by increased consumer confidence is key to industry success in the short to medium-term. This will have a positive influence on the prospects of both contracting and Professional Services firms.

2.3 Drivers for Change

Construction specific drivers will inevitably influence and be influenced by wider political, economic and technological change. Examples include demographic pressures, broad UK immigration policies, wider EU directives, future moves toward a more knowledge/service economy, welfare to work policies etc. Government may also have a more direct impact on construction skills demand and supply in the future through the extent and form of public procurement.

However, ConstructionSkills has confirmed that the most significant skills issues across its footprint are:

  • The current skills profile having a negative impact on construction industry performance, from craft through to professional, management and leadership occupations.
  • The risks of the industry adopting a ‘low skills equilibrium’ inhibiting technological change and productivity improvement.
  • The need to generate effective client led demand for improvements in quality and business performance – leading to improvements in the skills base and levels of competence.
  • The need to accommodate, understand and provide support for the very different needs of construction’s various sectors.
  • The need to positively respond to the Government’s UK Sustainable Development Strategy and make sustainability within construction a reality.
  • Balancing the flexibility provided through the industry’s large pool of self employed labour with the disadvantages and problems caused through a lack of investment in skills and qualifications.
  • The need for effective intelligence to identify and plan for localised shortages that may occur in specific regions or occupations, as the industry continues to operate under conditions approaching Full Employment at the professional, managerial and craft levels.
  • The need to redirect the funding targeted at training that does not meet the minimum requirements the industry expects and to focus limited resources towards Level 2 and 3 courses. Currently training and courses that do not lead to a qualification which supports the attainment of a job is prevalent.
  • The need to ‘Change the Face’ of construction and recruit people from outside the industry’s typical demographic – women and ethnic minorities are significantly under represented.
  • The need to get more employers engaged in training and the lack of suitable work placements, which is placing severe restrictions on the ability of colleges to provide new entrants to the standards required by the industry.

Ultimately, the long-term concern across all sectors of the industry and in every region of the UK is to ensure there are sufficient numbers joining to meet forecasts for increased demand (in the context of improved productivity) and to replace those that are leaving. Consequently, a key demographic issue is the loss of key skills due to retirement, and the addition of new skills through recruitment in the lower age groups.

The age profile of the construction industry for both professionals and contractors alike matches that of many UK industries. It is mature, ageing and has undergone significant change over the past 10 years. For professionals, managerial and manual occupations, the workforce has generally been distinguished by a decline in the share of the younger age groups in total employment and a rise in those aged 45 years and over. Despite positive efforts to encourage young persons to consider the construction as a desirable career choice at every level, the industry has an age profile that is significantly biased towards the 30-39 age band.

Figure 6 Age Profile of Construction Industry, United Kingdom: 2005

Source: Office for National Statistics, Labour Force Survey 2005

The under-representation of women and ethnic minorities remains a priority issue for the industry, as much in Professional Services as for contracting. 92% of all professionals working for Professional Services firms are male and in some professions this is as high as 98%.

Labour force statistics show that marginal improvements are being made in the recruitment from the non traditional female and BME groups. However, when compared with the UK workforce as a whole, the sector remains amongst the most gender imbalanced in the UK economy.

Whilst recognising that Government spending may be tight in the short-term, there is a concern that vocational qualifications are still not receiving the same levels of Government support as their academic equivalents. There is the perception that ‘vocational’ qualifications are primarily concerned with the ‘employability’ of young people and adults, however it is critical to understand and demonstrate that qualifications in construction are about developing competent people.

Making sustainability a reality will require everyone in the supply chain to know what their role is and to have the skills and knowledge to do it. The sustainability agenda in itself is a driving force for technological change and innovation. The development of new products and processes now take into account environmental impact, durability and performance, in addition to the more established concerns of aesthetics, workability and cost.

It is anticipated that continued advances in innovation and technology will to some degree off-set the decline in the numbers of individuals joining the construction industry; by enabling a greater outputs from lower inputs. However, if the uptake of innovation does not gather sufficient momentum – it is currently quite low within the sector – there are clearly limitations to what can be achieved through such processes.

Consequently, in the short-term (at least) the single largest factor determining whether the industry is able to respond to future demand remains the supply of skilled labour.

2.4 Identifying skills needs

To fulfil the mission set within the ConstructionSkills Sector Skills Agreement, it is essential that ConstructionSkills understand and communicate fully what skills are needed; where they are needed; when they are needed; and for what they are needed.

This requires unanimity of understanding amongst stakeholders and partners. It also requires a single set of comprehensive figures that set out the task and set the targets. The Construction Skills Network (CSN) is now in a position to answer some of the most fundamental questions relating to skills capacity accurately, robustly and in a meaningful way.

ConstructionSkills is the industry leader in analysing and forecasting employment and skills requirements across the whole of the SSC footprint. There is considerable complexity to overcome, which is due to the diversity of the industry structure in terms of the type of work, size of firms and large fluctuations in the nature, scale and volatility of demand that is generated locally, regionally and nationally. Different types of project link in with and to diverse industry structures and patterns of training supply.

The outputs of the CSN provide considerable detail and can be downloaded from the web site. Broadly speaking the situation is one in which some parts of the industry are operating under conditions approaching full employment at the professional, managerial and craft levels. This comes with some of the associated imperfections and difficulties that employers find in matching demand with appropriately skilled labour. However, if skills shortages were major and endemic to the whole industry then it would be identified by the CSN, in the Labour Market Intelligence and reported in major industry surveys as a constraint on trade. Wage and tender price inflation would also be much more apparent than they are at present. The industry has experienced a tight labour market for some time and evidence indicates pockets of skills shortages. However, these tend to be relatively specific and geographical or occupational in nature.

Figure 7 Quarterly Output and Activity Constraints: 1995-2005

Source: Department of Trade and Industry (DTI), Construction Forecasting Research, Federation of Master Builders

The CSN models and supporting research do predict hotspots in which localised skills shortages are likely to occur and alert ConstructionSkills where to take positive action. Examples do arise from time to time but forecasting up to 5 five years ahead gives the organisation time to plan. The Olympics, Thames Gateway, meeting the needs of Welsh Housing Quality Standard and the impact of the Northern Way, are all examples of areas in which the CSN is identifying where localised skills shortages may occur in the main trades, specialist occupations and professions, enabling ConstructionSkills to plan ahead to deal with these.

2.5 Key issues and challenges

Shortages and gaps

Research has indicated that the contracting sector's perception of a skills shortage is different from that conveyed by several national skills surveys. In such surveys vacancies are regarded as a skills shortage vacancy if there are a low number of applicants with the required skills; applicants lack work experience; and applicants lack qualifications. However, it is often the case that when construction industry employers talk of skills shortages they refer to quite specific and short-run recruitment difficulties. These include not being able to get a particular trade on-site for a period on a self-employed basis rather than not being able to recruit an actual vacancy. The situation is similar for architects and other professionals (particularly the smaller firms), many of whom are working at the limits of their capacity – providing lead times for those who want to engage their services. In neither case does this constitute a skills shortage.

The nature of the workforce

The construction industry presents another particular challenge in that it is served by an itinerant workforce because of the project-by-project nature of the sector. This means that some construction sites – especially large-scale projects - will draw in workers, usually on a sub-contracted basis. These are likely to be from other parts of the country, or abroad. Indeed, with self-employment representing over a third (38%) of the available industry labour geographic and occupational mobility is high.

The flexibility of such a large pool of self-employed labour offers significant financial advantages to clients. The disadvantage however, is the lack of investment in skills and qualifications by those who are self-employed. There is a strong tendency for career progression to lead towards self-employment, particularly in the main construction trades, where the financial rewards are perceived as being greater. This has obvious implications on the future training of both the individuals moving to self-employment, and the ability for the industry to provide sufficient opportunities for those wishing to join the industry.

Balancing migration, mobility and training opportunities

In the case of the Olympics and other major projects throughout the UK we are facing another major challenge – addressing the choice of immigration, or training the local/indigenous workforce. This is also an opportunity, as the focus and intensity of major developments and projects provides valuable work practice opportunities. Given the time to plan these can be exploited, enabling local people to acquire building skills at all levels and become employed in the industry. The use of qualified migrant labour is a logical and sensible response to filling peaks in demand on a temporary basis. Given that many migrants may return home when their own economies pick up there is a significant opportunity to skill up local people and change the face of construction.

Qualification levels

Skills issues are further complicated by the fact that the contracting part of the industry is biased towards lower level qualifications than the overall UK workforce and that employers’ perception of competence is not necessarily consistent with qualifications. Professional Services firms have generally tended to be less vocal about skills shortages per se, however there is wide-spread and consistent concern from employers about the levels of practical experience of applicants, particularly in terms of graduates not being job ready. In Great Britain a third of trainees undertake Level 1 VQs but this does not meet the minimum requirements the industry expects of its new entrants. Given the capacity restrictions faced by the industry it would be far more desirable to focus limited resources towards Level 2 and 3 courses and to cut back or abandon the Level 1 VQ altogether.

Employment, recruitment and capacity

The rate of unemployment in the industry showed little change in the twelve months to Autumn 2005 and continues to be below the national average at 3.6% compared to the national average of 4.7%. The UK wide ConstructionSkills Employer Panel Consultation Survey of August 2006, which addresses the needs of professionals as well as contractors, established that finding suitably skilled staff was second to increasing sales as the most common key business challenge reported by employers. However, those reporting recruitment as a major business challenge actually decreased by 5% from 20% in December 2005 to 15% in August 2006. The challenge of finding suitable skilled staff applied equally to both construction contractors (14%) and professionals (16%).

The picture regarding difficulties in recruitment remains a mixed one. Current evidence suggests that neither the contracting nor consultancy sectors of industry are significantly short of skilled workers, to the point of producing endemic or intractable problems that impact on their ability to deliver. Whilst there is every reason to expect that the forecast demand for additional skilled workers will be met during a time when the industry is close to capacity, there are concerns from some industry commentators that construction is becoming too reliant on the supply of migrant workers. They argue that current patterns of migration are creating an over supply of workers and that this is impacting negatively on employers’ up-take of training and the opportunities for home-grown trainees.

In a tight labour market employers want fully skilled and experienced workers, but logistically this is difficult when the supply of newly trained labour is determined by the flow from further and higher education, which is already at full capacity, and where practical experience is difficult to obtain. Consequently, growing numbers of workers have been drawn into the labour market from outside the UK as demand has increased.

Overall 6% of employers in both contracting and professional services currently employ or have employed over the last 6 months a worker who is not a UK citizen, although for London this increases to more than two-fifths (22%). It is estimated that non-UK workers account for at least 6% of the UK construction workforce, Incidence of migrant employment tends to be proportionately higher in the Professional Services sector, where many of the companies operate in a global market and with a workforce that takes in its permanent overseas offices. Also, many of the activities undertaken by professionals do lend themselves to ‘off-shoring’, and is very much enabled by advances in IT and communications technology.

Consultation with employers has suggested that in many cases the employment of non-UK workers occurred as a result of market demand, but without any particular intent. The one notable exception is that a third (29%) of Professional Services firms surveyed noted that the good skill levels was a main reason for employing non-UK applicants. However, the employment of non-UK workers is not without its challenges and potential implications for the industry, in particular ensuring that health and safety standards are achieved and that competency is evident through recognised qualifications.

The use of non-UK workers appears to have minimised labour inflation, keeping overall wage increases in the industry within reasonable limits (keeping the supply of skilled labour in line with demand) and in line with other industries. In this respect it has provided some relief from any skills shortages that may have existed. Ultimately this is not a sustainable solution in terms of encouraging an investment in the UK labour market. There is a need to further understand the flow and degree of dependence on migrant workers. ConstructionSkills is therefore working with recognised experts in the field of international migration to explore the impacts of recent trends on the longer term sustainability of industry employment structures.

2.6 Meeting the Demand

UK construction output growth is forecast to average 3% annually between 2006 and 2010, following a period of sustained growth that has lasted for over a decade. The industry is in the throes of delivering some of the most ambitious building projects in recent times – among them, the Glasgow Harbour Development, the Welsh social housing renewal programme, continued high investment in infrastructure and public building programmes in Northern Ireland, the Thames Gateway, the Government’s massive programme of school and hospital renewal and, of course, the 2012 London Olympics. The work of the industry really is at the heart of nation’s future.

Increases in output are expected across all sectors, with public housing, infrastructure and commercial activity likely to see the biggest rises. This compares with private housing and commercial sectors seeing the strongest growth in the previous five years.

Within this, two main shifts are identified that will affect contractors and professionals alike:

  • The first is that private output growth is likely to exceed that of publicly-funded construction between 2006–2010.

    o This is largely the result of a resurgence of the commercial sector (offices and retail), but also due to the completion of some major public projects and programmes toward the latter part of the forecasts.

    o It contrasts with the previous five years (2000–2005) which saw much faster growth in publicly-funded output (91%) than private (52%) for new work, due primarily to large public sector programmes of investment in new infrastructure, health, education, social housing renewal and regeneration.

  • The second is that growth is expected to shift southwards in the next five years,

    contrasting with 2000–2005, which saw generally much stronger growth in the North of the country than in the South.

    o Apart from Northern Ireland, which will benefit from a large public investment programme over the next 10 years, the strongest growth is predicted for the south-eastern corner of the country, driven forward by some very large projects in the offing – the Olympics, the Kings Cross redevelopment, big ports projects at Shellhaven, Felixstowe and Harwich, the East London Line extension, and the Victoria Station redevelopment, to name a few.

    o In 2000–2005, regions in the North of the country generally saw stronger growth than those in the South, particularly the East Midlands, Yorkshire and the Humber and Wales – driven by urban regeneration projects, housing, inward investment and creation/relocation of key Government departments and services.

By the end of 2006 it is estimated that employment within ConstructionSkills’ footprint is expected to be approaching 2.2 million, and to deliver forecast growth between 2006 and 2010, the number of construction workers in employment is likely to increase by around 212,000 (roughly 10% above 2006 levels) across the whole of the UK. This translates into a need for an additional 88,000 new recruits a year on average to fulfil the requirement created by additional demand and to take account of those who will leave the industry during the same period.

Within construction as defined by those employed on contracting (SIC 45) ConstructionSkills forecasts an annual requirement of 21,000 in the four main trades (Wood Trades, Bricklayers, Painters and Decorators, and Plasterers), 15,000 specialists and civil engineering occupations, 10,500 in management roles and 8,000 in engineering, IT and professional occupations, furthermore an additional 9,000 employees are forecast to be required within the Professional Services sector (SIC 74.2).

Figure 8 Construction Employment and Training Requirement, United Kingdom: 2006-2010

Occupation

Total Employment 2006

Total Employment 2010

Average Annual Requirement

Management & Clerical

420,670

457,120

19,140

Professional Services (SIC 74.2)

340,450

354,270

9,280

Technical & Professional

183,600

200,150

8,085

Main Trades

509,780

569,870

21,220

Specialists

202,710

225,920

8,670

Plant & Logistics

81,380

89,410

4,280

Civil Engineering

156,560

170,060

2,900

Non Construction Operatives

277,900

317,810

 

Total

2,173,050

2,384,610

73,575

Source: Construction Skills Network Model, 2006; Experian

The relatively large requirement for managerial and professional occupations is due almost entirely to the shift in focus towards a process driven industry that requires much more control. The move to integrate planning, design and procurement seamlessly into the construction process has necessarily placed more emphasis on the inputs as well as the outputs. The need for contractors to understand the concepts of value, quality and risk has required a greater ability to monitor, measure and analyse the construction process. This knowledge and experience can then be used to aid the allocation of resources more effectively, and to pre-empt and prevent problems. Consequently, this has resulted in an increased need to invest in the managerial and leadership skills of the workforce.

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Office for National Statistics, Labour Force Survey 2005

Professional Services as defined by Office for National Statistics as SIC 74.2 covers all architectural and engineering activities and related technical consultancy. Occupational groups working within the Professional Services sector include Architects, Quantity Surveyors, Consulting and Design Engineers and Planners, and professional disciplines as defined more specifically by the CIC in their regular Professional Services surveys.

Department of Trade and Industry (DTI), Department of Finance and Personnel Northern Ireland (DFPNI); Experian

When last measured in 2002 the output of construction Professional Services firms was found to be £13.6 billion (ref, CIC Construction Professional Services Survey, Davis Langdon and Experian, 2003)

Data taken from the CIC Construction Professional Service Survey, 2003. This survey is in the process of being updated for 2006.

constructionskills.net/research/constructionskillsnetwork

Construction Forecasting Research, Construction Industry Focus Survey July 2006.