The UK construction industry is poised for growth as it recovers from the effects of the COVID-19 pandemic and looks towards a more sustainable future. But while there’s an uptick in the volume of building projects, both big and small, the industry faces a series of challenges that are changing its risk profile, as Al Baker, Head of Construction, UK & Lloyd’s, and Paul Howard, Head of Coverholder & Alternative Distribution UK & Lloyd’s, explain.
The UK construction sector looks to be in rude health. After the challenges caused by the COVID-19 pandemic – which for construction included supply chain bottlenecks and labour shortages among other things – the industry is reporting encouraging projections for the coming year, despite concerns over increased prices for certain materials.
According to the Office for National Statistics, output across the UK construction sector recently reached its highest point since September 2019, driven in large part by an increase in repair and maintenance work.
And as well as engaging in large-scale building projects, many construction companies are seeing an uptick in demand from people whose working pattens changed during the pandemic and so wish to make renovations to their homes. Others are reporting an increase in projects to redevelop high streets as they see a shift away from physical stores to having warehouses and logistics and distribution centres to meet online shopping demand. There’s also an increasing interest in building health and wellbeing facilities and reimagining office spaces for a post-COVID environment, among other projects.
The UK construction industry’s output grew to more than £14.7 billion in January 2022, the third consecutive monthly increase, according to the Office for National Statistics. But while there are definite green shoots coming through for the construction sector, there are some notable challenges ahead.
Price crunch
The cost of many raw materials has increased markedly in recent months. According to the Monthly Statistics of Building Materials and Components report, published by the UK Government’s Department for Business and Energy and Industrial Strategy, the cost of construction materials rose every month in 2021. And in July 2021, for example, the price of iron ore was 97% more than at the same point the previous year.
While prices for some construction materials are showing signs of levelling off after many months of continued hikes, many prices remain at historic highs and some continue to increase.
The cost of some materials, like steel and timber, is beginning to plateau, experts say, although the effect of the conflict in Ukraine is putting some upwards pressure on prices.
But the UK Timber Trade Federation notes that while ‘stability’ has returned to the market for wood, as stocks have been replenished, ‘normality’ has not returned. The combination of the ongoing impact of the COVID-19 pandemic and Britain’s exit from the EU, among other factors, have also contributed to a labour shortage that has affected the supply chains for these materials - issues that are likely to persist for some time, the TTF noted.
Added to the high prices for some materials, some – such as tiles and cement - remain in short supply, while other rising costs, like the price of gas, are contributing to challenging conditions for many projects. A recent report by the Royal Institute of British Architects (RIBA) suggested the cost inflation, compounded by labour shortages, are causing, and likely will continue to cause, delays to some construction projects going forward.
As the world begins to emerge from the shock of the COVID-19 pandemic, for companies big, small and medium-sized in the construction industry, having a good handle on their supply chain has become even more important. Establishing good engagement with the supply chain, understanding potential frailties and pinch-points, and putting in place plans to manage supply chain issues – and rehearsing those plans – is now vital to construction companies’ risk management. And, of course, this is where insurers can bring added value.
Challenges and opportunities
Across all sectors of the economy, companies are focused on meeting the Environmental, Social and Governance (ESG) standards that they’ve set and which their stakeholders expect them to uphold and exceed. For the UK construction industry, this poses challenges but also provides great opportunities.
In the UK, the built environment is believed to contribute about 40% of the country’s greenhouse gas emissions, and the construction industry is thought to create more than 60% of all UK waste. The Climate Change Committee estimated that, in 2019, about 13% of the UK’s emissions came from the manufacturing and construction sectors.
Carbon-emission reduction and ESG-compliance are being more closely scrutinised by investors and other stakeholders in construction projects. And the industry has ambitious CO2 emission reduction targets to meet if it is to fall in line with the UK government’s nationwide goals of a 68% reduction by 2030 (and a 78% reduction by 2035) of C02 emissions, compared with 1990 levels.
In 2021, the Construction Leadership Council published its ‘Construct Zero Performance Framework,’ in response to the government’s 10-point plan for a Green Industrial Revolution, which aims to achieve net zero C02 emissions from the UK by 2050.
The Construct Zero framework sets out nine priorities for the construction sector:
- To accelerate the shift of the construction workforce to zero-emission vehicles;
- To optimise the use of Modern Methods of Construction – known as MMC – to improve logistics;
- To champion developments that enable connectivity with low-carbon modes of transport and incorporate readiness for zero-emissions vehicles, such as electric car charging points;
- To work with the government to retrofit homes to improve the energy efficiency of existing housing stock;
- To increase the capability to deliver low-carbon heating in buildings;
- To enhance the energy efficiency of both new and existing buildings;
- To implement carbon measurement in construction activity;
- To become world leaders in ‘designing out’ carbon; and
- To support the development of innovative low carbon materials.
These targets will require the construction sector to innovate in many areas and in projects both large and small. Many construction companies are already well advanced in finding ways to achieve these targets. For example, using modern methods of construction to make modular structures can reduce construction time, costs and the amount of waste, as well as improve the logistics of projects.
Changes in the ways materials are manufactured, transported, used – and re-used – all will help the construction industry meet its ESG goals, but they also change the risk profile of many projects. Working with insurers and risk experts can help construction firms not only to better understand these risks and opportunities but also ensure they have coverage in place that suits their changing needs.
At a time when many costs are rising, our construction clients are looking for flexible and efficient insurance capacity to help them transfer some of the risks they face. With the values of materials and buildings subject to fluctuation, brokers and coverholders have been working with clients to help them understand their sums insured – to try to ensure they have the correct levels of coverage for their changing risk profiles.
Coverholders have the experience and specialist technical expertise to help the client to better understand the potential pitfalls of MMCs as well as offer risk transfer solutions.
Delegated Underwriting Authority capacity is a flexible and efficient answer to many of the construction industry’s changing needs, particularly for SME-sized companies and self-builders.
As the construction industry embraces the challenge of reducing carbon emissions and new ways of building, while keeping pace with the current demand, we’re keen to work with our clients to help them better understand, manage, mitigate and transfer some of the risks – old and new – that they face, and to play our part in working towards a greener future for all.
