Harnessing the perfect storm

Avoiding the risks and seizing the opportunities in a post-brexit economy.

For anyone trying to develop a business strategy or make important decisions, Brexit is certainly looming large on the horizon. However you voted, whatever your preferences for a hard or soft Brexit, it cannot be denied that the proposed departure of the UK from the EU in March 2019 will have a significant impact on the UK economy, and construction in particular.

Many of you will already be feeling the effects that the uncertainty wrought by the referendum, and the governments handling of the negotiations to date has had on development. Activity in the construction industry fell by 1.3% in the second quarter of this year, particularly in the private sector. Much of this is attributed to businesses holding off on investment decisions, in particular with speculative development in sectors such as retail and commercial. The recent raising of interest rates by the Bank of England could be seen as a sign that a recession is imminent.

It could be argued that this is just another blip, part of the cyclical nature of our industry. The slowdown is nowhere near as bad as it was in 2008, and we rode that one out okay – why should this be any different?

There are signs that this could be more of a risk than the great recession however. Firstly, the departure from the EU is not a global event – the rest of the global economy is ticking on relatively nicely, meaning that investors may look to put their money into more stable countries. Investment drives construction, so if it starts to decline then so will the supply of construction projects.

Secondly, where as in 2008 the fall in the supply of construction projects led to a fall in prices as the market adjusted, the weak pound and the rising cost of both labour and materials will prevent this from happening – meaning that the cost of construction will remain high even as the supply of projects dries up. The construction industry could find itself stuck in the 1970’s phenomenon of ‘stagflation’, when economic growth stalled even as inflation rose.

So, it’s all doom and gloom right? Time to batten down the hatches and prepare for the lights to go out? Not necessarily, in fact there are reasons to believe, if we respond to the challenges in the right way, that Brexit could be good for us in the long term.

For a start, Brexit is not the only seismic shift about to hit the UK construction sector. BIM, 3D printing and the internet of things are just some of the technologies promising to disrupt our industry. In any period of change there are opportunities as well as threats, and whilst there will inevitably be casualties, we should endeavour to ensure that construction emerges as a better industry.

Necessity is the mother of invention, and the increased competition from fewer projects and higher costs will hopefully force the industry to address the productivity issues that have been ignored for decades. Unbelievably we are no more productive today than we were in 1994, despite the emergence of the internet and digital smart phones! Australia provides an interesting example of why this is so – the industry there is heavily unionised and so labour costs are kept high, but this provides an incentive for Australian contractors to invest in productivity boosting technology. In the UK, where EU immigration has contributed to low labour costs, there is little incentive to invest in more efficient processes.

This drive for productivity may also push us to review the traditional contracting process, encouraging collaboration towards shared objectives rather than wasting time and resources on lengthy contractual disputes. New forms of contract and delivery methods could be required to support this, with BIM friendly practices such as the Integrated Project Delivery (IPD) model pointing the way ahead.

Finally, the investment required to enable the roll-out of new technology across supply chains has the potential to forge closer alliances with supply chain partners and designers, ensuring that the future is more about true collaboration and shared incentives rather than adversarial contracts and vested interests.

In the same way that Brexit offers the UK an opportunity to evaluate where this country is and what we want it to become as a nation, it will also provide the construction industry with an opportunity to re-invent itself, fundamentally reassessing the way we commission, design and deliver construction projects. There is no guarantee, on either count, that this will inevitably leave us better off - only through our vision and engagement can we make this a reality for future generations. That is why Willmott Dixon is investing heavily in innovation, ensuring our business is agile enough to adapt to an uncertain market and enabling our customers to succeed in an uncertain world.