29Th September 2020 Construction Update 780 Px Web Banner

New guidance from Build UK urges firms to make future contracts ‘open book’

CONSTRUCTION UPDATE

  • Build UK has published new guidance to help reduce COVID-19 related disputes. The guidance urges firms to make future contracts ‘open book’ in order to help avoid disputes arising from delays. The industry body said these types of contracts, under which contractors are reimbursed based on records of incurred costs, would reduce the risk of disputes by increasing the visibility of what has been agreed in the contract. They would also help firms avoid disputes if the Government were to issue new COVID-19 restrictions while a project was underway. Build UK said:

“[Open book contracts] avoid any arguments about what was included or should have been included and leaves the parties free to focus on how best to work around the new constraint.”

  • According to the ONS’ fortnightly Business Impact Survey, surveyed construction firms reported that, on average, the proportion of their workforce that were on furlough (or partial furlough) leave had fallen from a high of 45.7% during 6th-19th April to just 5.9% during 24th August – 6th September. Since the end of July, UK construction firms have reported that a lower proportion of their workforce have been on furlough leave compared to the ‘All Industries’ sector classification. This has prompted a number of the UK’s larger contractors to comment that an extension to the furlough scheme is no longer necessary.
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  • A report co-authored by Mark Farmer has suggested that the Government should embark on a programme to build an additional 75,000 modular homes a year by 2030. The proposals call for a further cash injection to the recently launched £11.5bn Affordable Housing Programme in order to help encourage wider industry acceptance and to move the sector beyond its current “cottage industry” status. Mark Farmer said that the industry’s production capacity was limited to around 10,000-15,000 units a year at present, with only 4,000-5,000 of this capacity being utilised. He cautioned that demand was being held back by concerns over the stability of MMC manufacturing businesses and the lack of common standards which would allow another supplier to take over a scheme in the event of a business collapse.
  • Construction output rose by 17.6% in July 2020 compared to the previous month, with all sub-sectors experiencing output growth. However, ‘All Work’ Output in July was down 12.8% compared to the same month in 2019 and infrastructure was the only sub-sector to exceed July 2019 output values. The monthly figures indicate that although the recovery continues, it needs to be viewed against the context that output is recovering from a low base. The threat of a second wave of COVID-19 and a no-deal Brexit once the transition period ends could also scupper the recovery. Indeed, there are signs that the current uncertainty is leading to increased investor caution in committing to new projects.
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  • Construction firms surveyed by the ONS continue to report that only a relatively small proportion are at a moderate risk of insolvency (10%). Only a negligible amount (ie less than 1%) reported there was a severe risk of insolvency. The majority said that there was either a low risk (51.9%) or no risk at all (27.3%) of insolvency. Although recessions typically bring a rise in the number of insolvencies, in August, only 16 construction companies fell into administration (down from 19 in July). Despite previous fears over the short-term impact of the crisis on cashflow, the number of firms falling into administration has remained fairly steady over the past three months.
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CONTRACTOR NEWS

  • Data from Glenigan revealed that contract awards reached nearly £6.4bn in August. Most work was awarded in the civil infrastructure sector, with deals worth over £1.76bn (representing 28% of all work awarded in the month). The biggest client in this sector was the Department for Transport (DfT) which awarded eight contracts worth a combined £1.46bn. Industrial was the next best performing sector with clients awarding firms £1.71bn of work. The highest value contract was handed to NG Bailey to build a lithium ion battery factory in South Wales – a £1.2bn job accounting for some 70% of the value of the contracts awarded to the sub-sector.
  • HS2 is trialling a new artificial intelligence (AI) tool on a number of its sites that are being managed by the Skanska Costain Strabag joint venture. The technology, which is being developed by Skanska, will support carbon and cost estimation by automating the BIM processes so that different design options can be simulated using different types and quantities of construction materials. Ultimately, this means that carbon emissions and environmental impacts of construction can be visualised, measured and compared, resulting in the design of more environmentally-friendly solutions. It is expected that the tool will also help to shorten pre-construction phases and reduce project management costs.
  • Structural steelwork contractor Billington saw revenues fall by 30% to just £32.8m in the six months to June 2020, according to the firms latest financial results. The group said that COVID-19 had brought about consequential restrictions to site access, resulting in project delays and cancellations. Despite this, the group managed to stay profitable during the period with chief executive officer Mark Smith noting that:

    • Group operations returned to near full capacity and the majority of projects have restartedIts 2021 order book continues to grow from both delayed and new projects
    • There are a number of larger projects in prospect and the number and quality of enquiries is at near historic levels
    • The firm is seeing opportunities in all sectors, particularly large retail distribution warehouses, data centres, food processing developments, public sector works and rail infrastructure
    • More robust developers are continuing with commercial office development projects where significant pre-lets can be secured
    • Supply conditions have improved in the UK steel market
    • There has been continued upward price pressure of the raw materials for steel production
  • Multiplex has signed up to the World Green Building Council’s ‘Net Zero Carbon Buildings Commitment’ - the first contractor in the world to do so. The firm is aiming to be the first European contractor to have a carbon reduction target aligned with limiting climate change to 1.5 degrees as well as rolling out a new wellbeing standard (‘Better Workplaces’) for temporary construction offices and welfare facilities based on the WELL Building Standard. Stephen Smith, director for safety, health, environment and quality said:

“We have put sustainability at the heart of our business strategy, making it intrinsic to our offering across all projects.”

COMMODITIES & MATERIALS

  • Materials distribution firm SIG made a £125.4m pre-tax loss in the first six months of 2020, stating that it expects to stay in the red for the second half of the year. As a result, the firm has had to complete a £165m equity raise to shore up its finances and help rebuild the business. Revenue has been hit by the COVID-19 pandemic which caused a slump in sales. However Steve Francis, Chief Executive Officer of SIG said that despite the significant economy uncertainty in all their markets, long term fundamentals remain sound in the group’s markets across Europe. He also said that:

“Trading was better than anticipated during the peak lockdown months of March to May, compared to our initial estimates of the possible COVID-19 impact, and the Board now expects full year sales to be moderately higher than guided in May.

  • Data from British builders’ merchants show that building material sales surged by 38.9% in the three months to July 2020 compared to the previous three-month period. Furthermore, In July 2020, sales of building materials were only 1.3% below July 2019 sales and some categories were even ahead. In the three months to July 2020, sales of landscaping material more than doubled (up 130%). Timber & Joinery Products followed, rising by 44%, and Heavy Building Materials sales were up 36% over the period. Mike Rigby, chief executive of MRA Research which produces the monthly Builders Merchant Building Index (BMBI) reports said:

“These sales figures demonstrate the resilience and strength of a V-shaped recovery in the sector.”

UK ECONOMY

  • Chancellor Rishi Sunak has announced a new Jobs Support Scheme – a ‘radical’ package of wage subsidies and loans that will replace the existing Job Retention Scheme that will end on 31st October. Under the new scheme the Treasury will only step in to subsidise people who have worked at least a third of their usual hours. The aim of the scheme, which will slash Government support per job to a maximum of 22%, is to help support ‘viable jobs’ rather than jobs that are effectively already redundant.
  • Central Government borrowing for the first five months of the 2020-21 financial year reached £221bn - 11 times greater than the highest ever cash borrowing figure at this point in the financial year since equivalent records began 36 years ago. The high deficit, which has pushed public debt over 100% of GDP for the first time since the early 1960s, was behind the Government’s decision to scale back support for jobs. However, the OBR has said that the level of borrowing was in a better place than it had previously expected.
  • Growth in business activity slowed in September according to the latest IHS Markit/CIPS UK flash composite PMI, which fell from a 72-month high of 59.1 in August to 55.7 in September. The flash PMI, which covers both the services and manufacturing sectors, signalled that although activity continues to grow, the recovery shows signs of flattening out. Some economists have said that reinstating restrictions on business opening hours and encouraging people to work from home again could cause the recovery to stall completely in Q4.


GLOBAL ECONOMY

  • President of the European Commission Ursula von der Leyen has said that she is ‘convinced’ a trade deal with the UK is still possible. Despite the dispute over the UK’s internal market bill (that, if parliamentary approval was secured, would override elements of the Brexit withdrawal treaty), both the EU and the UK plan to continue trade round negotiations. However, EU officials noted that the bloc will not be able to sign off and ratify a trade deal until the dispute over the internal market bill is resolved.
  • The OECD has said that damage to the global economy this year will be less than previously expected, but still “unprecedented”. The organisation now predicts a decline of 4.5% in 2020, versus the 6% drop forecast back in June. Although the UK will be hard-hit (with a 10.1% forecasted drop in GDP for the year), the OECD said that the UK is no longer expected to experience the deepest contraction of the major G20 economies this year. The new revised figures predict several countries, including Italy, India and South Africa will experience contractions larger than the UK’s.