Contractors face a year of “feast and famine”

Richard Threlfall, head of infrastructure, building and construction at KPMG.

The coming 12 months will be a year of “feast and famine” for contractors, depending on the sector of the industry you work in, says Richard Threlfall.

2017 will divide the construction sector into winners and losers. Contractors in infrastructure will win more work as government and utilities companies continue to spend heavily on road, rail and energy investments. Contractors who depend largely on commercial demand will see a decline in demand as corporates continue to delay investment decisions pending clarity on Brexit. 

We will also see significant regional variation. The West Midlands will benefit from the HS2 effect which has already seen an uptick in investment into the region, whilst worries over Brexit will continue to gently deflate the London housing bubble. 

An industry divided by demand will nonetheless be united by the common challenge of rising materials prices, already responding to the fall in the value of sterling. The skills shortage will add further pricing pressure in civils, as well as playing large in the Brexit immigration debate due to possible curbs on the provision of labour from Europe. 

I remain encouraged that the new government has signalled its commitment to infrastructure by embracing the three Hs – Heathrow, HS2 and Hinkley Point – despite strong lobbying in the summer to cancel all of them. 

I am therefore bullish on UK infrastructure demand in 2017, but far less confident on the longer term. I remain concerned that as the economy weakens the government’s investments in infrastructure will become less sustainable. Rising inflation and the subsequent erosion of buying power will mean less government income from taxation. I expect this to result in delay to schemes like Crossrail 2, the Trans-Pennine road tunnel, HS3 and other mega projects. And similarly I expect regulators to put downward pressure on utility investment programmes as household incomes are squeezed.

Amidst all this macro-economic uncertainty, construction industry CEOs need to keep focussed on the prize of achieving competitive advantage through offering clients greater efficiency and predictability. Whilst politics and economics may dictate the winners and losers of 2017, in the long-run this industry will be owned by those who invest in technology and skills.

Richard Threlfall is head of infrastructure, building and construction at KPMG.