Industry Spotlight 2020

We take stock of both Northern Ireland and the Republic of Ireland’s economic and construction performance in 2019, and what we can expect to see into 2020 and beyond.

 

INDUSTRY OUTLOOK

NORTHERN IRELAND

 

Jody Wilkinson, Director, Project and Cost Consultancy, Northern Ireland

 

It’s been a mixed bag of opportunity for the Northern Ireland (NI) construction industry in 2019. Although there has been little or no growth, and in some sectors contraction in the industry there has been some positive signs in the volume of public sector work coming to market.

There is still no denying the uncertainty brought about by political instability in NI and the United Kingdom (UK) generally is holding back investment in private capital projects. However as ever, we are optimistic that whatever happens in the next few months we will at least have some direction.

 

AECOM is hopeful that the pent-up demand for private sector capital investment will be unlocked as market conditions are clarified in the UK generally. However, it is noted that that whilst there has been a general trend of growth in the local industry since 2014 there has been a recent dip of 1.5 percent in the last 12 months. This slight contraction in output is largely down to a noticeable reduction on housing of 10.7 percent in Q2 of 2019. We are hopeful that is just a blip in the Q2 stats and that we will see a rebound in housing over the next couple of quarters. On a brighter note infrastructure investment has been growing strongly and is 27.6 percent higher than this time a year ago. The volume of infrastructure is now at its highest level since 2012.

Talent Supply

Labour availability is becoming an issue for certain key trades and we understand that electrical and plumbing trades along with brick layers are particularly hard to secure for key projects. This is likely to do with the opportunities for these key trades in Republic of Ireland (RoI) and Great Britain (GB). In GB there is a shortage of key trades due the effects of the uncertainty around availability of European Union (EU) labour.

This labour availability issue is driving changes in our industry, particularly with the private sector where off site manufacturing and modular construction methods are becoming more mainstream for hotels, student accommodation and residential. It is not thought this will alleviate all labour shortages, but it is helping. 

Ni spotlight summary

  • The introduction of mean narrow average as a means for calculating the commercial element of a tender.
  • The readiness of cpd to accept that alternative procurement methodologies to design and build should be considered when appropriate.
  • The opportunity for sme professional practices to partner with larger practices to access design competitions encouraging new talent into our industry.
  • Civil servants demonstrating willingness to work with industry to try push forward capital projects that may have been held up in the current political deadlock.

Tenders & Contracts

Despite parts of the market being subdued we are noting inflationary pressures on tender prices and some material prices. For example, for materials from China such as granite and other quarried products where inflation has been seen of up to 20 percent in the last year.

General construction tender price inflation has been around 5 percent for the year to Q4 2019. We believe this is driven in part by a busier market in the Republic of Ireland and the continued success of NI contractors winning work in Great Britain and choosing to price work in NI at similar rates.

As in ROI, the continued shortage of labour in key areas coupled with the effects of whatever will happen with the UK’s trading relationship with the EU will likely continue to put upward pressure on tender prices. When coupled with a weakening outlook for the local economy, making it hard to contextualise what impact this will have in the next year.

Given the seemingly contradictory statistics and general feel of the market, assuming an orderly exit from the EU and no further shocks to the value of sterling, AECOM is projecting tender price increases of 3.5 percent in NI for the next 12 months.

The last twelve months overall have been stable. However we consider the next twelve months will bring some opportunity to NI, whether it’s with Construction & Procurement Delivery (CPD) procurement methodologies allowing a more sustainable construction market in the public sector or with some clarity coming from the the current political instability giving local private and FDI investment the confidence to invest

INDUSTRY OUTLOOK 

REPUBLIC OF IRELAND


Tomás Kelly, Director, Programme and Cost Consultancy, Ireland

 

In 2019, ROI saw the seventh successive year of growth in construction. The strong performance in 2019 was driven by a combination of continued investment in the commercial sector, gradual recovery in the residential sector and a 24 percent increase in public sector capital spend. AECOM expect infrastructure investment to be strong in the coming years with investment in airports, public transport, broadband, water and utilities generally. Other sectors continuing to expand will be the residential and hi-tech sectors.

The Public Capital Programme figures included in Budget 2020 are estimating an outturn of a 24 percent increase in Exchequer capital spending in 2019 on that spent in 2018. This increase included significant increases in Department of Transport, Tourism and Sport and Department of Housing, Planning and Local Government. The figures included for 2020 are estimating an 11 percent increase with the focus being on the same departments plus increases in Health and Communications, Climate Action and Environment.

Tenders and Contracts

Construction costs are the key driver of tender prices and in this regard labour costs continue to increase. The latest Sectoral Employment Order saw increases in October 2019 of 2.7 percent and a further 2.7 percent due in October 2020.  In respect of materials costs increased by approximately 1.5 percent in 2019 and looking forward to 2020 a level of uncertainty exists arising from Brexit with potential tariffs and / or increased logistic costs potentially arising. AECOM anticipate construction cost increases of circa 2.2 percent in 2020.

AECOM projects tender price increases of 5 percent in Dublin and 3.5 percent in the regions in 2020. In respect of construction output, last year we presented a range of scenarios averaging a projected €22.5bn for 2019. We anticipate further growth in the value of construction output in 2020, though at a reduced level of circa 10 percent.

It remains a concern that the headline increases in value of construction output could be significantly taken up by tender price inflation. This will present a real challenge in delivering all on the objectives in Ireland 2040. If tender prices continue to rise, the competitiveness of the industry will be increasingly under  ressure. This is probably most evident in the residential sector where the viability of projects continues to be challenging.

There appears to be increasing disquiet in the industry towards public works contracts and their unsuitability for the construction industry of today. Whilst some elements need review, it is important to acknowledge that there are other parts that bring benefits to the management of construction projects. When they were being introduced, there was a widespread expectation that there would be a marked shift in tenders to account for the increased risk being passed to contractors. Of course, the almost simultaneous crash resulted in this not materialising. Over a decade later, some changes to the contracts would be welcome and action is needed to encourage wider participation in public sector contracts.

ROI spotlight summary

  • Construction sector employment in q3 2019 up 2.3 per cent on same period in 2018
  • Government exchequer capital spend estimated to increase by 11 percent in value terms in 2020
  • Residential unit completions at 14,852 for first 9 months of 2019 is up 19 percent on same period in 2018
  • Residential unit commencements at 19,856 for first 9 months of 2019 is up 22 percent on same period in 2018

Dublin and the regions

As the economy continues to grow and an unemployment rate of circa 5 percent – which is sometimes considered full employment – most employers in the industry continue to face the challenge of recruiting and retaining staff. For the Greater Dublin Area, it is particularly challenging, where there is a premium to attract staff due to the higher cost of living leading to an extended commute. There is an increasing trend amongst employers, partly driven by staff retention and partly by advances in the use of technology, to facilitate employees working from home or in other flexible office solutions.

The regions are finally starting to see an upturn. Initiatives such as the development of Advanced Technology Units by IDA Ireland around the country in Monaghan, Sligo, Galway, Limerick and Cork give confidence to the market. Arising from the commercial and human resources pressures highlighted earlier associated with Dublin, companies are increasingly looking at the value achievable and importantly the potential of regional locations for attracting and retaining employees, we see this impacting on the market with speculative office developments in Galway, Cork and Limerick.

RECENT ECONOMIC TRENDS
ACROSS THE CONSTRUCTION INDUSTRY
IN THE REPUBLIC OF IRELAND

 

Dr Catherine Murray, Associate Director, Economics

 

The construction sector is subject to procyclical fluctuations, shifting between periods of accelerated growth in output and periods of stagnation or contraction. Construction and the wider economy are intrinsically linked, and the cranes dotted around the skylines of our cities are a visible manifestation of a growing economy. Following the shrinkage of the construction sector from 2007 by almost two-thirds, the sector faces coordination, timing and resourcing constraints

 

Productivity shows the relationship between the output and input needed to undertake the work, including labour, all technology and equipment, and is a measure of efficiency in the economy. An analysis of gross value added per employee across varying sized construction firms indicates:

  • Large firms (over 250 employees) had significant increases in their productivity levels, returning to pre-recession levels by 2016
  • Businesses with less than 10 employees have the highest levels of productivity since 2013
  • Small (10-49 employees) and medium (50-249 employees) firms are lagging behind the large and micro firms, with productivity levels below the industry average.

It should be noted that the Irish construction industry is comprised of a high proportion of self-employed people, or small firms who are subcontracted to larger contracting firms.

 

 

Government capital spending rose from €3.8 billion in 2012 to €8.1 billion in 2020. The National Development Plan 2018-2027 addressed the underinvestment in infrastructure over the recession period, and the importance of Government capital expenditure for the industry is clear from 2011 to 2014. Going forward, the National Development Plan gives a degree of certainty to the construction industry over the next decade, but also highlights the need to manage cost inflation within the sector, particularly relating to labour supply and skills within the sector.

While this story of boom and bust growth in the construction industry is familiar and part of business cycles, there are significant differences in the current cycle from the construction-fuelled growth of the 2000s, and lessons that need to be remembered. The economy is not reliant on the construction sector for growth as it was at the peak of the Celtic Tiger boom. At the end of 2006 for instance, 11 percent of Ireland’s labour force was employed in construction. Today, this figure is just over 6 percent, similar to levels seen in the 1990s. There were 140,000 employed in the construction sector in 2019 compared to 240,000 in 2007.

In the coming decade, the construction sector will need to address challenges and transitions that will have significant social and economic impact, including transitioning to a low carbon economy, preparing for a downturn, dealing with digital and technological advances and paradigmatic shifts in the face of continuous change.