Total systems change is needed to address construction’s deep-seated malaise

The collapse of ISG has once again shone the spotlight on construction’s broken business model. Six years after the collapse of Carillion led to a parliamentary review, here we are again: another Tier One contractor failing, with the loss of more than 2,000 jobs and projects stalling around the country.

Will our industry ever learn? The short answer is ‘no’, because there are too many vested interests in maintaining the status quo. It is these vested interests that argue even now that ISG was just a bad actor, unreflective of the wider construction industry. The longer answer is that it won’t change because the issues are too deep rooted, the problems are systemic – and systems change is hard and takes time.

Let’s look at the facts. The UK construction sector is consistently ranked number one for insolvency, with more than 3,000 firms failing every year. In the year to June 2024, a record 4,690 construction companies fell into insolvency, according to the Insolvency Service – a 2.1% increase on the previous year and a huge leap of 53.3% on the same period in 2020.

Contractors continue to report wafer thin profit margins: a 2021 study by consultant Turner & Townsend found that the UK construction sector had the lowest margins in the world at just 3.9% average, compared to 4.6% in North America and 6.1% in Europe. Many report margins much lower than 3.9% which is simply unsustainable. In a high-risk industry, it takes very little – a series of late payments, a dispute over costs, fluctuations of costs of materials or labour – to tip a company into a loss.

These are not new issues and go back much further than ISG or Carillion. Throughout my career, there have been numerous reports diagnosing construction’s ills, going as far back as Sir Michael Latham’s review in 1994. And, if we are perfectly honest, despite progress in some areas and good work by some Tier Ones, the industry remains beset by many of the fundamental problems identified in that review and others since, not least when it comes to low productivity.

ONS data tells us that output per construction worker stands at £35.69 per worker hour, some 13.5% behind the UK average. In a recent RICS Productivity Survey, more than one in five (22%) respondents in the UK construction industry said they never even measured labour productivity – the highest of the five global regions surveyed. Can you imagine the manufacturing industry not measuring their productivity?

Alongside this is the failure to invest in innovation and skills and an ever-widening skills gap. There are around 2.04 million workers in construction – 5.1% lower than a year ago and the lowest level this century. To deliver the homes and infrastructure the country needs, the Construction Skills Network estimates the industry needs 225,000 new construction workers by 2027. Where will we find these? How will we attract talent to our industry?

To resolve the acute and interrelated problems besetting construction, we must reform the economic model. We need to change the system that puts bad incentives in place for contractors to race each other to the bottom, a system that sees some Tier Ones holding onto payments, putting suppliers into trouble and that fails to create sustainable margins that will enable investment in the skills, innovation, research and development that can take the industry forward.

At Reds10, we firmly believe that the solutions lie in the industrialisation of our industry, with the mainstreaming of Modern Methods of Construction (MMC), which has the power to transform our industry. The benefits of MMC – around cost, quality, productivity and sustainability – are now both well-rehearsed and proven.

But the reform agenda goes well beyond MMC. Our industry needs wide-ranging modernisation and that needs to start with the failing Tier One contractor model. A business model with a main contractor managing an ever-growing chain of smaller suppliers is inefficient, drags down productivity and fails to incentivise investment in skills and innovation. As a result, despite decades of technical advances in construction, the benefits have not flowed through to improved productivity.

We need a new model of Tier One contractor that brings more of the supply chain and design in house, so the innovation that has been happening can be properly harnessed to drive improvements in productivity. We need a new business model, with more Tier One contractors developing their own workforce, as construction used to do (we can learn from the past as we look to the future).

That is our vision at Reds10 – and we are showing that it is not only possible but can deliver better results for clients and the communities where we work. Some Tier One contractors are moving forward with this agenda, but progress across the industry is too slow. Unless the industry moves forward, we will remain stuck in the same unsustainable cycle, waiting for the next Carillion or ISG, and failing to deliver the homes and infrastructure our country so desperately needs.