{"id":17145,"date":"2022-08-05T12:30:21","date_gmt":"2022-08-05T12:30:21","guid":{"rendered":"https:\/\/c-link.com\/blog\/\/"},"modified":"2024-06-23T17:07:09","modified_gmt":"2024-06-23T16:07:09","slug":"construction-industry-downturn-strategies-for-contractors","status":"publish","type":"post","link":"https:\/\/opengra.com\/c-link2\/blog\/construction-industry-downturn-strategies-for-contractors\/","title":{"rendered":"Construction Industry Downturn Strategies for Contractors"},"content":{"rendered":"

Executive summary:<\/strong><\/b><\/h3>\n

The <\/span>construction industry<\/span> downturn means that as an industry we face an <\/span>acute recession<\/span>, influenced by high <\/span>mortgage rate<\/span>s, <\/span>stubborn inflation<\/span>, and economic stagnation. Key sectors like <\/span>private housing<\/span> and infrastructure are experiencing significant declines. <\/span>Private housing output<\/span> is <\/span>projected to fall by 19% in 2023 and remain flat in 2024<\/span><\/a>, while <\/span>infrastructure output<\/span> will see a marginal decline <\/span>due to delays in <\/span><\/a>major project<\/span><\/a>s<\/span><\/a>. The <\/span>construction industry<\/span>‘<\/span>s <\/span>downturn in activity<\/span> mirrors the economic backdrop of previous recessions, where high <\/span>financing cost<\/span>s and reduced demand impacted growth. Construction companies have begun to become cautious with their employment numbers, as such these main contractors must adopt strategic measures, including diversification and cost management, to navigate these challenging times and prepare for the construction market\u2019s potential recovery by 2025.<\/span><\/p>\n

Off the back of the <\/span>construction industry<\/span> downturn, subcontractors face unique challenges, often magnified by their dependency on main contractors and the project delivery methods used. Key factors critical for their survival include financial capital, relationship assets, managerial assets, human assets, legal framework, and geographic scope. Successful subcontractors often build long-term relationships with main contractors, seek financial soundness by prioritizing payment methods, and maintain flexibility by keeping lean organizational structures. Diversification into international markets has also been a successful strategy for many subcontractors, often facilitated by established relationships with main contractors.<\/span><\/p>\n

Examples and detailed insights from previous construction industry downturns highlight the importance of financial soundness, maintaining strong relationships, and adopting lean management practices. Investing in <\/span>skilled worker<\/span>s, adhering to legal frameworks, and expanding into international markets can help mitigate risks. Government interventions, such as liberalized FDI policies and incentives for affordable housing, significantly support the <\/span>construction industry<\/span> during recessions by increasing liquidity and stimulating demand.<\/span><\/p>\n

Additional strategies include survival strategies focused on <\/span>retaining existing clients<\/span><\/a>, diversification into emerging markets and innovative sectors, strategic mergers and acquisitions, and prudent cost management and retrenchment measures. These approaches can help <\/span>construction firm<\/span>s remain resilient and better positioned to weather economic recessions, ensuring long-term growth and stability in the <\/span>construction industry<\/span>.<\/span><\/p>\n

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Recession in construction<\/strong><\/b><\/h3>\n

A recession is a <\/span>macroeconomic <\/span><\/a>term that refers to a country\u2019s severe economic decline. In the US, the <\/span>National Bureau of Economic Research<\/span><\/a> defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, and employment. In the UK and Europe, a recession is defined as a period of negative <\/span>economic growth<\/span> for two consecutive quarters.<\/span><\/p>\n

Current <\/strong><\/b>Economic Condition<\/strong><\/b>s and Forecasts<\/strong><\/b><\/h3>\n

In recent months, it has been reported that a recession is becoming more likely to hit the global economy, and more specifically, the UK economy. <\/span>Goldman Sachs <\/span><\/a>has increased its forecast for a recession from 15% to 30% in the next year, while Bloomberg believes the risk of a UK recession in the next 12 months is now almost 50-50. Clearly, in a post-COVID, post-Brexit world, and with ongoing conflict in Europe, there remains significant uncertainty in the global economy, and the outlook for the UK is somewhat bleak. With that in mind, we need to consider the potential impact on our sector, construction.<\/span><\/p>\n

T<\/strong><\/b>he <\/strong><\/b>Construction Industry<\/strong><\/b> <\/span>Downturn<\/strong><\/b><\/h3>\n

The <\/span>construction industry<\/span> is a vital part of the economy, contributing significantly to GDP and employment. However, it is also highly susceptible to economic fluctuations. A recession in construction can profoundly affect various sectors of the industry, including main contractors. According to the Construction Products Association (CPA), the <\/span>construction sector<\/span> is expected to experience a severe recession, with output predicted to decline by 2.2% in 2024, a stark revision from an earlier forecast of a 0.3% contraction. This <\/span>construction industry<\/span> downturn is attributed to various factors, including high <\/span>mortgage rate<\/span>s, <\/span>persistent inflation<\/span>, and economic stagnation. The CPA\u2019s economic analysis indicates that <\/span>private housing output<\/span> will fall by 5%, and <\/span>private housing<\/span> repair, maintenance, and improvement (RMI) work will decline by 4%.<\/span><\/p>\n

Insights from Recent Forecasts<\/strong><\/b><\/h3>\n

Forecasters have downgraded the expected construction recovery next year, warning the industry is now set to remain in recession until the start of 2025. High interest rates will continue to drag down <\/span>housing activity<\/span>, with infrastructure and even industrial activity expected to slide in 2024. This revision highlights a more prolonged period of economic struggle for the <\/span>construction industry<\/span>.<\/span><\/p>\n

Economists say UK interest rates are now anticipated to remain at this level until 2025 due to <\/span>stubborn inflation<\/span>. This extended period of high rates will write off the previously expected recovery in private house building and housing RM&I. As a result, <\/span>construction output<\/span> is now forecasted to fall by 6.8% in 2023 and 0.3% in 2024.<\/span><\/p>\n

Lessons from the 2008 Recession<\/strong><\/b><\/h3>\n

Looking back at the most recent recession in 2008-2009, which occurred as a result of the global <\/span>financial crisi<\/span>s, we can glean valuable insights. The 2008 recession, often referred to as the \u2018Great Recession,\u2019 started in the UK in early 2008 and was caused by rising energy prices and the <\/span>housing market<\/span>\u2019s collapse. It lasted for over a year and was the longest-lasting recession since the Second World War. It\u2019s important to note that a recession in construction generally happens first among the other industries, construction is the first to go, as companies stop investing in infrastructure and development. <\/span>Construction activity<\/span> in the UK fell by 17.1% between the first quarter of 2008 and the second quarter of 2009 \u2013 three times the drop of the overall economy in the same period.<\/span><\/p>\n

By December 2008, the <\/span>construction sector<\/span> had shrunk faster than ever before. First, housebuilding suffered, but as the recession \u2018bit,\u2019 civil engineering and <\/span>commercial construction<\/span> also fell at record rates. From the fourth quarter of 2009 until the same period in 2011, there was a short period of recovery, but this was not sustained, which resulted in another recession in construction before a sustained recovery in 2012. According to a survey by IFF Research, 54% of construction companies had seen decreases in revenue during the 12 months before October 2009. As revenue decreased, construction companies naturally tightened their outgoings, leading to redundancies. From a peak of <\/span>603,000 construction professionals in employment in 2008<\/span><\/a>, this dropped by 10% during the recession.<\/span><\/p>\n

Sector-Specific Impacts<\/strong><\/b><\/h3>\n

Private Housing<\/span>: <\/span>Private housing<\/span>, the largest <\/span>construction sector<\/span>, is projected to be the hardest hit. The sharp increase in <\/span>mortgage rate<\/span>s has led to a 30-40% fall in demand for new homes, causing a predicted 19% decline in completions and output this year. This weak demand is expected to persist into 2024, with no growth anticipated until 2025. This slowdown will directly impact main contractors involved in residential projects, potentially leading to layoffs and reduced profitability.<\/span><\/p>\n

Private Housing Repair and Maintenance<\/strong><\/h3>\n

The <\/span>private housing<\/span> RMI sector, the second-largest <\/span>construction sector<\/span>, is also on a <\/span>downward trend<\/span>. Rising living costs have curtailed discretionary spending on home improvements, while fewer property transactions have reduced refurbishment activity. Output in this sector is expected to fall by 4% in 2024 before a modest recovery in 2025. Main contractors specializing in RMI will need to adapt to this reduced demand, possibly by diversifying their services or focusing on energy-efficiency retrofits, such as insulation and solar photovoltaic installations.<\/span><\/p>\n

Infrastructure<\/strong><\/b> <\/span><\/h3>\n

Infrastructure remains a bright spot in the <\/span>construction industry<\/span>, with high <\/span>levels of activity<\/span> driven by projects like HS2 and <\/span>Hinkley Point C<\/span>. However, the sector is not immune to the broader economic challenges. Delays and cancellations of road and rail projects, coupled with financial constraints at the local government level, are expected to result in a 0.5% decline in <\/span>infrastructure output<\/span><\/a> in 2024. Main contractors in this sector must navigate these challenges by focusing on secured projects and seeking opportunities in emerging areas like offshore wind and National Grid upgrades.<\/span><\/p>\n

Additional Insights on Infrastructure<\/strong><\/b><\/h3>\n

The CPA has highlighted the importance of <\/span>major project<\/span>s as a <\/span>driver of growth<\/span> in the sector and for construction overall. Despite the anticipated declines, activity will remain near current high levels due to ongoing projects such as the Thames Tideway Tunnel and HS2 between Old Oak Common and Birmingham.<\/span><\/p>\n

Financial Capital<\/strong><\/b><\/h3>\n

During the <\/span>Spanish <\/span><\/a>financial crisi<\/span><\/a>s<\/span><\/a>, subcontractors faced difficulties in securing financial support from banks, which became critical for survival. One company, recognizing the high risk of delayed payments, started requiring payment guarantees from main contractors and preferred clients who could ensure timely payments. Ensuring financial soundness by selecting clients based on their payment reliability and securing payment guarantees can help subcontractors navigate financial constraints during <\/span>construction industry<\/span> downturns.<\/span><\/p>\n

Relationship Assets<\/strong><\/b><\/h3>\n

A <\/span>successful Spanish subcontractor built long-term relationships with main contractors<\/span><\/a>, which helped secure consistent work even during the economic downturn. By establishing trust and consistently delivering quality work, they became preferred partners, ensuring a steady pipeline of projects. Building and maintaining strong relationships with main contractors can provide a competitive edge and ensure a steady flow of work, mitigating the impact of reduced demand during recessions.<\/span><\/p>\n

Managerial Assets<\/strong><\/b><\/h3>\n

Many <\/span>Spanish subcontractors adapted to the economic crisis<\/span><\/a> by streamlining their operations and adopting lean management practices. One company reduced its hierarchical structure and empowered site managers to make quicker decisions, increasing efficiency and responsiveness. Adopting lean management practices and streamlining operations can enhance a subcontractor\u2019s ability to respond swiftly to market changes and maintain competitiveness during the <\/span>construction industry<\/span>‘s downturn.<\/span><\/p>\n

Human Assets<\/strong><\/b><\/h3>\n

Subcontractors focused on retaining skilled and loyal workers despite the downturn. One company prioritized keeping their best site managers and foremen, recognizing their critical role in maintaining project quality and client satisfaction. Investing in and retaining <\/span>skilled worker<\/span>s can ensure that subcontractors maintain high standards of work and client satisfaction, which is crucial for long-term success during economic downturns.<\/span><\/p>\n

Legal Framework<\/strong><\/b><\/h3>\n

The implementation of stricter regulations in Spain, such as the Law 3\/2011 on Public Contracts, forced subcontractors to improve compliance and operational standards. This led to better safety practices and higher quality work, making compliant subcontractors more competitive. Adhering to and leveraging legal frameworks can improve operational standards and competitiveness, providing a strategic advantage during <\/span>construction industry<\/span> downturns.<\/span><\/p>\n

Geographic Scope<\/strong><\/b><\/h3>\n

During the crisis, several Spanish subcontractors expanded their operations internationally, often in collaboration with established main contractors from their home country. This strategy helped them diversify their project portfolio and reduce reliance on the struggling domestic market. Expanding into international markets can provide new opportunities and mitigate risks associated with domestic market downturns, ensuring business continuity and growth.<\/span><\/p>\n

Government Interventions<\/strong><\/b><\/h3>\n

In India, government initiatives like Foreign Direct Investment (FDI) with policy liberalization played a crucial role in reviving the <\/span>construction industry<\/span> during economic downturns. By attracting foreign investors, the sector received much-needed financial infusion, which helped stabilize and grow the industry. Government interventions, such as liberalized FDI policies and incentives for affordable housing, can significantly support the <\/span>construction industry<\/span> during recessions by increasing liquidity and stimulating demand.<\/span><\/p>\n

Preparing for a Recession in Construction<\/strong><\/b> <\/span><\/h3>\n

Preparing for a <\/span>construction industry<\/span> downturn is likely good practice, as with a 50-50 chance of a recession in construction, it\u2019s wise to get ahead of the game. Here are some strategies for main contractors:<\/span><\/p>\n

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