UK Construction Industry

UK Construction Industry Overview

A Corporate Profile

By Corporate Watch UK
Completed March 2004


1. Introduction


UK Construction Industry Overview

The UK's construction industry has been enjoying a period of strong growth, with the infrastructure and the commercial construction sectors at the forefront of this trend.1 The annual round of results published by construction firms in March 2003 showed that the sector is shifting away from one-off contracts carrying high risks and big returns toward lower risk long-term deals that go beyond construction to designing, maintaining and operating buildings.2 The Private Finance Initiative in other words.

 

Private Finance Initiative

This is the government's favourite way of funding major new public building projects such as hospitals, schools, prisons and roads. Private consortiums, usually involving large construction firms, are contracted to both design and build a new project, and also to manage it. The contracts typically last for 30 years. The building is not publicly owned but leased by a public authority, such as a council or health trust, from the private consortium.

The private consortium raises the cash to build the project. It is then paid back with interest by the government through regular payments over the period of the contract. As with any form of hire purchase, buying something on tick is more expensive than paying for it up front. The Edinburgh Royal Infirmary is often cited as an example of how expensive the PFI can be. It cost £180m to build and will cost £900m to pay for. Unions are opposed to PFI as they claim that one of the main ways that private companies profit from the PFI is by staffing the buildings as cheaply as possible. The pay and conditions of front line workers in PFI buildings is typically worse than their counterparts in the public sector3.

Since the advent of PFI, the construction industry has found itself on much more stable ground. Between 2001 and 2002, its output is estimated to have increased by 9.7%.4 According to lobbyists, the Major Contractors Group (MCG) (see Key Trade Associations), which represents UK firms such as Carillion (formerly part of Tarmac), Costain and Amec, construction companies engaged in the private finance initiative expect to make between three and ten times as much money as they do on traditional contracts.

Bill Tallis, the director of MCG, said construction firms traditionally received rates of return of 1.5% to 2% on contracts but were now expecting margins of 7.5% to 15% on PFI building schemes. The high profit available to investors in PFI schemes explains why John Laing PLC has sold off its basic construction company and bought up stakes held in such projects by hard-pressed Amey PLC.5

This strategy is reinforced by figures from the European Construction Industry Federation (ECIF), which show that the UK construction sector grew by over 8% last year while its counterpart in Germany and France slumped by 2.5% and 0.7% respectively.6

The UK government defends PFI by its use of something called the 'public sector comparator'. This shows whether or not privately financed schemes offer better value for money than conventional funding. The main problem with this is that the government has provided an accounting device called 'risk costing' which has meant that private firms generally emerge as winners. When a consortium of private companies agrees to build something for a public body, it acquires the risk that the project might fail. This risk is 'costed' and becomes a key component of the value-for-money calculations. Unfortunately, according to the Association of Chartered Certified Accountants (ACCA), this is often exaggerated.

For example, the average cost over-run on public hospital building projects is 7%. The private operators are allowed to claim a 'risk' of 12.5%. By contrast, no risk costing whatsoever is added to the public sector comparator. This led Jeremy Colman, the auditor-general at the national audit office, to proclaim that some of the comparators being used are 'utter rubbish' and 'utterly irrelevant'.7 While the UK Treasury will not agree any scheme that does not beat the public sector comparator it admits that the government is reviewing this model of calculating value.

 

Sectors

Housebuilding accounted for 38.6% of the construction industry's output in 2000.8 The amount spent on public housing has never exceeded £2bn whereas the figure for private housing has consistently been double or triple that amount.9

New homes are currently exempt from the Sale of Goods Act. Each year there are 150,000 homes purchased throughout the UK. With an average value of £100,000 per property this means that an industry worth in excess of £1.5bn per year is unregulated by the government and exempt from usual trading standards, leaving owners of new homes with little or no protection for the most expensive purchase they will ever make. This is made even more concerning by the fact that 84% of new homes have defects.10

Housebuilding output is forecast to increase by 19% at constant 1995 prices between 2001 and 2005.11

Infrastructure accounted for 9.2% of all construction work in 2000 - a slightly lower figure than for the previous 4 years - and was worth £6.43bn. Road building is the main source of infrastructure work.12

The National Audit Office revealed that more than £434m worth of road-construction contracts - 51% of those awarded - were won by five firms, Balfour Beatty, Budge, Fairclough, Alfred McAlpine and Tarmac.13

Industrial construction is the smallest of the basic sectors of the whole construction industry. In 2000, the output of private construction work was £3.7bn, or 5.3% of the total construction sector.14

Commercial construction output, which includes a wide variety of commerical work, accounted for just over 18% of all construction work in 2000.15

Building materials embrace a wide range of materials and components such as bricks, tiles, cement and timber. The UK construction materials sector is undergoing a period of rationalisation, with many UK companies now forming part of international companies. The UK building materials market is forecast to increase by 13.7% at current prices between 2001 and 2005.16

 

Economic Importance

The UK construction industry provides a tenth of the UK's gross domestic product, employs 1.4 million people and is worth around £65 bn per annum.17 With an output of £81.9bn in 2002,18 the UK construction industry is ranked in the global top ten.19

In 2002, 6.7% of construction firms went bankrupt compared with 14.6% in 1992.20

 

Safety

Compared with all other industries - who had 110 deaths per 100,000 employees - the construction industry had 338 employees die on the job in 2002.21

In the City of London alone, these include; being crushed by a 500 gallon drum, entering an unlit room which was actually a ventilation shaft and falling down it, falling from a height where a guard rail had been removed, being hit by a 20 foot scaffold pole, falling after a cradle used for cleaning windows collapsed... all resulting in a verdict of accidental death.22

 

Equality

Gender equality in the construction industry has actually worsened over a decade. In 1992, there were 184,000 women and 1,662,000 men employed. In 2002, there were still 184,000 women but 1,773,000 men. Of these, the ratio of white employees to non-white was 20:1.23

In terms of builder's wages, the UK falls behind Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain, Sweden and Switzerland.24


References 1'Construction Industry Market Review 2003,' Key Note Publications, 01.01.03. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=34791. Viewed: 19.01.04

2'Unison Companies Update,' Unison, 09.04.03. See: www.unison.org.uk/acrobat/B798.pdf. Viewed: 26.01.04

3'Q&A: private finance initiative,' Matt Weaver, The Guardian, 01.10.02. See: http://society.guardian.co.uk/privatefinance/story/0,8150,802670,00.html. Viewed: 09.03.04

4'Construction Industry Market Review 2003,' Key Note Publications, 01.01.03. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=34791. Viewed: 19.01.04

5'PFI triples profits, say firms,' Terry Macalister, The Guardian, 08.09.03. See: http://society.guardian.co.uk/privatefinance/story/0,8150,1037400,00.html Viewed: 23.01.04

6'PFI triples profits, say firms,' Terry Macalister, The Guardian, 08.09.03. See: http://society.guardian.co.uk/privatefinance/story/0,8150,1037400,00.html Viewed: 23.01.04

7'Public fraud initiative,' George Monbiot, The Guardian, 18.06.04. See: http://society.guardian.co.uk/futureforpublicservices/comment/0,8146,739525,00.html. Viewed: 08.03.04

8'UK Construction Industry Market Review,' Key Note Publications, 01.08.01. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=3921. Viewed: 19.01.04

9'Construction Statistics Annual 2003, DTI, 01.09.03. See: www.dti.gov.uk/construction/stats/constat2003.pdf. Viewed: 22.01.04

10Inspector Home. See: www.wimpeyrawdeal.co.uk/. Viewed: 22.01.04

11'UK Construction Industry Market Review,' Key Note Publications, 01.08.01. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=3921. Viewed: 19.01.04

12'UK Construction Industry Market Review,' Key Note Publications, 01.08.01. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=3921. Viewed: 19.01.04

13'The Great Comic Relief Fraud,' Special Publications No. 5. See: www.geocities.com/carbonomics/MCsppub/11sp04/11sp04b_f.html. Viewed: 04.02.04

14'UK Construction Industry Market Review,' Key Note Publications, 01.08.01. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=3921. Viewed: 19.01.04

15'UK Construction Industry Market Review,' Key Note Publications, 01.08.01. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=3921. Viewed: 19.01.04

16'UK Construction Industry Market Review,' Key Note Publications, 01.08.01. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=3921. Viewed: 19.01.04

17'Building, Construction and Property Services,' DTI. See: www.dti.gov.uk/sectors_building.html. Viewed: 19.01.04

18'Construction Industry Market Review 2003,' Key Note Publications, 01.01.03. See: www.researchandmarkets.com/reportinfo.asp?cat_id=0&report_id=34791. Viewed: 19.01.04

19'Construction and Fraud,' Tom Crowley, 01.03.03. See: www.maxima-group.com/a-0509.shtml. Viewed: 19.01.04

20Construction Statistics Annual 2003,' DTI. See: www.dti.gov.uk/construction/stats/constat2003.pdf. Viewed: 19.01.04

21'Construction Statistics Annual 2003,' DTI. See: www.dti.gov.uk/construction/stats/constat2003.pdf. Viewed: 19.01.04

22'Construction workers killed in the City of London,' London Hazards Centre, 28.04.03. See: www.lhc.org.uk/kaw/kawdate.htm. Viewed: 29.01.04

23'Construction Statistics Annual 2003,' DTI. See: www.dti.gov.uk/construction/stats/constat2003.pdf. Viewed: 19.01.04

24'Construction Statistics Annual 2003,' DTI. See: www.dti.gov.uk/construction/stats/constat2003.pdf. Viewed: 19.01.04

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