We take stock of bold efforts to beautify a Cinderella sector
The construction sector has long been a drag on UK productivity. Now, thanks in part to a recent public-private initiative, tentative evidence is emerging of a turnaround in one of the biggest sectors of the economy.
The improvement is badly needed. Whereas output per hour worked across the whole UK economy rose by 28.8% between 1997 and 2020, in the construction industry it fell by 7.3%. In one big sub-sector, the construction of buildings, output per hour dropped by 25%, according to ONS figures. Changing things would carry a significant economic prize: construction makes up 7% of output and 9% of jobs in the UK.
Although labour productivity has grown slightly faster in the construction industry than in the broader economy since the 2008 financial crisis, the level of productivity in the sector remains below the UK average, which in turn is weaker than in major economies including the US, Germany and France.
Why has the performance been so sluggish? The independent Farmer Review in 2016 provided some insights. The diagnosis pointed to a fragmented sector, a lack of collaboration, a lack of R&D and innovation, and a misalignment of incentives between those procuring construction services and those delivering them as the key factors.
Given this, the government launched the Transforming Construction Challenge (TCC) in 2018. The government backed the initiative with £170m in public spending over the four years to 2022, with a target of £250m of matched industry investment being delivered by 2027.
The aim is to radically reshape the sector with a view to using the latest digital manufacturing techniques to build safer, healthier and more affordable places to live that use dramatically less energy – and, in the process, closes the productivity gap with the rest of the economy.
Critical to meeting the TCC’s aims is the dissemination of a number of construction technology concepts across the sector. These “TCC concepts” include integrated energy capture and storage systems, off-site manufacturing and improving the whole-life value of buildings.
Commissioned by the government, Frontier Economics has been assessing the TCC since its inception in partnership with BMG Research. We recently published the final phase of the evaluation, which we conducted between May and December 2021.
So far, so good
Overall, we found the TCC has helped to improve the understanding and adoption of TCC concepts for those engaged with the programme. And there’s strong optimism that the use of TCC concepts will have positive impacts for firms and the sector as a whole. Our survey of organisations engaged by the TCC found high expectations that applying TCC concepts will positively impact revenue, profit, productivity and speed of delivery. Among respondents that were already using TCC concepts, 61% reported a large positive impact on revenues and 79% a positive impact on profits.
But transforming the construction sector will be a marathon, not a sprint. As yet, there is relatively limited evidence on the wider impact of the programme beyond those organisations that are directly involved.
The TCC set a target of influencing a total of £10bn of projects which achieve productivity improvements of around 13.5%. As of 2021, this target had already been surpassed, with internal TCC data showing a cumulative committed project value of £29.3bn. While that’s hugely encouraging, it doesn’t yet translate into demonstrable productivity improvement, which will take time to materialise. ONS productivity data point to slightly better productivity growth in construction than in the broader economy in the period after the TCC was set up. But, given other factors and the time lags involved, it is not in itself evidence that the TCC has influenced sector-wide productivity.
Give it time
Many TCC activities remain at the demonstration or proof-of-concept stage. As such, it is not yet possible to directly link the TCC to the performance of construction sector firms and their suppliers. The programme needs to be given more time.
Nevertheless, given the positive feedback from organisations involved, we would expect a significant improvement in the performance of the construction sector if the TCC concepts are more widely adopted. Case studies for our evaluation indicate that numerous activities would benefit from applying the concepts.
Similarly, we found early evidence that the use of TCC concepts could improve the quality, whole-life costs and speed of delivery of buildings. There is also clear optimism in the industry about the role of the concepts in improving the environmental performance of built assets, for example by introducing innovative solar energy technologies and by retrofitting affordable housing.
Procurement strategies are evolving under the influence of TCC concepts. Instead of a narrow focus on cost, procurement decision-makers in the public and private sector are now considering a broader range of factors, such as the impact on the environment. However, there is still limited evidence at this stage that the concepts are actually being included in procurement: change does not happen overnight.
By contrast, there is stronger evidence that the TCC has boosted investment in research and development by sharing the risks involved. The TCC offers matched funding to foster R&D and investment in its concepts, and 53% of successful applicants to the scheme report a significant increase in R&D spending as a result of their involvement with the Challenge. Data from the TCC suggests that it will meet its cumulative co-investment target of £250m early – by 2023 rather than 2027.
Our evaluation provides strong evidence that the widespread dissemination and adoption of TCC concepts is a precursor to transforming the UK’s construction sector, whose poor productivity record has held back the economy as a whole.
The TCC has exceeded its internal targets on the projects it has influenced which achieve productivity improvements as well as reductions in whole-life costs, delivery time and emissions.
What’s more, the evidence we gathered suggests that firms engaged with the TCC have a high appreciation of TCC concepts and are adopting them. The challenge now is to increase awareness across the sector – and perhaps channel future funding accordingly.