Aspects of The UKs Construction Industry - Essay Example

It is estimated that nearly 2.2 million people work in UK’s construction industry, making it the country’s biggest industry. Obviously, there are some laws and regulations which govern the industry. Constraints such as Contracts, Laws, Statues, Regulations of government agencies etc make sure that the entire process is handled smoothly. “Law is meant to include federal or state enacted laws or statues, the rules of federal and state regulatory bodies promulgated to give practical effect to enacted statutes and common law. Common law is that body of past court decisions, dating from the legal practice in UK prior to American Independence.” (Bartholomew, 2001, p.2) The UK construction industry has witnessed a fall of nearly two percent in construction activity during 2010 compared with last years 12 per cent drop and is expected to remain in recession. It is estimated that by the end of 2010, construction industry will have lost £16 billion of work in just three years and the growth is not expected to return until 2011 and even then it is forecasted to be relatively subdued at just one per cent per year in the consecutive three years coming. An interesting factor to be observed here is regarding the private Vs public construction companies’ progress. Over the past one and half year, private sector construction fell by almost 20 percent, losing approximately £14bn of work and a further fall of four per cent is anticipated during 2010. However, the public sector construction, on the other hand, rose due to government’s fiscal stimulus and contractors on government frameworks were able to take advantage of some of the falls experienced from the private sector. There are high chances that this trend is set to reverse in the near term as a result of economic recovery set to lead to a rise in construction funded by the private sector. On the other hand, the state of the public finances is likely to lead to a deep fall in public spending on construction. Critical fact lies in spending on public schools and housing, as well as on energy and transport infrastructure and they are not cut sharply, otherwise recovery for the construction industry might be delayed and consequently, the economic recovery in the UK might be severely hindered. Following are some of the points highlighted in the forecast report produced by Construction Products Association (CPA) 1. With some new contracts signed, in addition to existing work brought forward through governments fiscal stimulus, orders rose 60 per cent during 2009 and although the number of roads projects signed in the last first quarter of 2010 has remained broadly flat compared to one year ago, the value of these projects has increased fourfold 2. Budget 2010 also provided an extra £285m for the managed motorways program 3. New orders rose 165 per cent during 2009 as water companies signed framework contracts for the whole spending period in advance 4. Rail only accounted for 20 per cent of infrastructure output during 2009, yet the sub-sector is set to enjoy a five-year period of growth that will see it become the largest infrastructure sub-sector 5. Despite the pessimistic forecasts, the association predicts work will increase in some sectors, such as private house building, where a growth of 32 per cent is expected between 2010 and 2012. In addition, construction activity is forecast to be boosted by infrastructure work in the regulated sectors of rail, water and energy In spite of the recovery features which reveal the signs of improvement recorded at the turn of the year, it has been anticipated by most of the observers that any recovery will be slow and prolonged. The current upswing will be fuelled by temporary factors such as time-bound fiscal stimulus and the effect of inventory cycle. Factors such as high unemployment, low investment and public-sector retrenchment may lead to a sustained period of relatively low growth in developed countries. There are quite a few potential chances of the risk that a double dip recession could still take place in the form of a roller-coaster of economic stimulus and cut back. The quality of any recovery will be hugely important in order to ensure that the budget deficits are narrowed, confidence is restored, and to ensure that the foundations are in place for the coming cycle. UK construction industry has an overall mixed fortune for the year 2010. While it is expected to continue to shrink in 2010, the infrastructure and housing sectors should have a better year. When the case of outside of the UK is considered, limited private investment and public sector deficits might hold back growth in Europe. Infrastructure investment in emerging economies with rich resources could however grow rapidly, thereby creating the potential for pressure on the availability of some raw materials. If situations in Asia are observed, apart from Russia, countries like Brazil, China, India and some other Asian economies have relatively emerged as safe from the recession. As they do not have a huge problem of debt accumulated in West, they are expected to continue their growth at a good rate. Primary reason for this is, these countries depend on exports for growth, which is a continuing trend which will contribute further to persistent global imbalances in borrowing and saving strategies. On the other hand, UK is unlikely to benefit from growth as a majority of UK’s exports are to US and other European markets. The main cause for the uncertainty in the current situation may be due to the unexpected events of 2008 and 2009 and the year 2010 is expected to be a year of many unknowns. “The importance of purchasers cannot be over-emphasized. Construction is about providing a service. This provision is complex because of the nature of the product, the duration of the project and the involvement of so many people.” (Murdoch, Hughes, 2008, p.5). Few of the reasons might be but not limited to the election in the UK, changes to credit-ratings, currency fluctuation, the effect of removal of stimulus, commencement of fiscal tightening and finally an increased terrorist threat. The decision-making environments in government and business will continue to be highly complex, with a chance of most of the risks on the downside. Budget deficits of UK must be addressed. The timing, speed and scale of the switch from stimulus to cut back or retrenchment could be the most important and difficult policy decision taken in the UK in 2010, made even more difficult by the election timing. In order to bring confidence in market, many commentators believe that the cuts should be delayed until 2011, even though plans for retrenchment need to be published as soon as possible. Key issues to be considered here are achieving a balance between protecting economic recovery and serving the people and retaining the confidence of bond markets. A spending gap after the election may be very damaging for UK construction at a point when revival may just be about to commence in the private sector. Construction might suffer a double whammy of withdrawal of stimulus and start of spending cuts. In the UK, in addition to extra investment, funding has been brought forward from the 2010/2011 tax year. Also, a 20% reduction in future capital investment programs is on the plan. Construction has often been like a safety valve of the economy, and with many public sector programs dependent on scarce funding, public sector projects could become even harder to get off the ground after 2010. “Although the estimated total volume of construction is an impressive number, one has to consider the structure of the industry when evaluating the use of management practices. The make up of the construction industry is extremely fragmented” (Ritz, 1994, p.6). Another important point to be noticed is the merger and acquisition which is back on the agenda. This will increase activity in the banking, financial services and consulting sectors as strong organizations position themselves for improvement. Although merger and acquisition will not directly benefit construction, it will contribute to wider business confidence and may create downstream opportunities for future investment. Furthermore, on the dark side, a combination of low margin work, poor cash flow, scarce capital and the consolidation of banks’ loan books might result in a continuing stream of business failure. It is quite possible that the loss of capacity and the increased raw material prices shall be the main drivers of upward pressure on construction costs during 2010. During the 2009, deflation was one of the greatest concerns of many economists which have introduced a vicious circle of falling prices, lower wages and reduced demand. The overall economy has escaped this fate; construction has suffered rapid and sustained cuts in prices. It has to be noticed that construction prices are already down by 18% in UK from the peak and still have some way to go, before supply and demand return to balance. Certainly, the year 2010 cannot be a bright year as devaluation could be great for the UK’s net trade but bad for construction, with most of construction’s imports being denominated in Euro. “Britain cannot afford any further fiscal stimulus, King warns” - Mervyn King, urges the government not to introduce more fiscal aid in next months budget as Britains public finances are already in such dire straits. He also warned that the government should not unveil any further fiscal stimulus in April’s budget. The Office for National Statistics has reported a £9bn deficit in February, bringing total public-sector net borrowing for the first 11 months of the fiscal year to a record £75bn - more than £50bn higher than for the same period last year. Government should be careful about further plans as the countrys public coffers are under even greater pressure from falling tax revenues and higher benefit payouts. Chances are potential for construction is unlikely to have a positive year during 2010, but foundations are now being set for improved prospects for the future. Actions taken during 2009 and 2010 to improve credit conditions, continuing need to invest in social and physical infrastructure and the limited supply of most private sector property assets are promising the return of demand in the foreseeable future. Property and construction’s future will however be characterized by much less money. As a result, the investment will need to be focused on maximizing efficiency. Example: Unlocking value from existing assets, or by achieving better outcomes with less resource. The quality of UK’s recovery will be determined in part by the condition and readiness of the construction industry. Good thing amongst the gloom is that organizations that are comfortable with uncertainty, ready for recovery and are able to deal with opportunity shall thrive in the near future. Bibliography Stuart H Bartholomew (2001) - Construction Contracting: Business and Legal Principles (2nd Edition) John Murdoch and Will Hughes (2008) – Construction Contracts Law and Management (Fourth Edition) George J Ritz (1994) – Total Construction Project Management CPA – Construction Products Association Read More