01 / Introduction
Even though the outcome of the 2024 election was not determined by manifesto commitments on housebuilding or clean energy, in its aftermath the public expectation is for a significant increase in infrastructure delivery.
From offshore wind to a further wave of new-town developments, growth promises cannot be delivered without shovels in the ground. Although current prospects for infrastructure investment remain uncertain, the UK faces decades of additional work as private sector investors direct capital into energy transition, expanded water and power networks and new communities.
Based on current requirements and its public investment mandate of 1.3% of GDP, the National Infrastructure Commission (NIC) forecasts that real-terms investment will peak at between £70bn and £80bn a year during the 2030s – massively up from the £55bn delivered on average each year over the past decade.
But the UK construction sector faces many challenges in raising its game. Our cities are some of the most expensive to build in the world – all sitting in the top 20 on a list of building costs, according to the Arcadis International Construction Cost Index.
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Furthermore, the NIC has recently highlighted that crucial investments, including the transition to low carbon heat, are well behind programme and require acceleration.
Stop-start programmes – as exemplified by HS2, but which are also evident in regeneration and housing programmes, compound the sector’s challenges in terms of an investable pipeline, an imbalanced risk allocation and a fragmented supply chain.
For every £6 allocated to public infrastructure investment during the previous parliament, £1 remained unspent – often because of imbalanced business cases that underestimated the capital costs but also did not present a credible monetary and non-monetary benefits case. With each £1 invested having a multiplier of over £2.80, a lot of benefit has been lost through delayed or cancelled delivery.
The sector’s low productivity is frequently cited as a drag on capacity. The Construction Leadership Council (CLC) highlighted in a 2023 report a 13% lag in output per hour compared with the wider economy, resulting in a £45bn output gap. However, more than £30bn of this gap is rooted in preparatory actions such as those within planning and procurement. This indicates that it will require complex, joined-up solutions to make progress. Construction cannot go it alone.
As the Building the Future Commission has highlighted, the challenges of the UK construction sector are well understood. However, the incoming government has not debated these issues as a factor in the delivery of its ambitious programme. As this programme takes shape, the debate should focus on what steps are needed to create the capacity that is required to deliver. This review aims to identify some of the options available to increase performance and grow capacity.
02 / How is the industry performing?
Establishing a baseline for current industry performance is not easy. There are multiple dimensions, ranging from total workload, the size of the pipeline and, importantly, the financial performance of the organisations involved. The relative cost of infrastructure delivered into the UK also needs to be considered.
Size of the market
In volume terms, the infrastructure sector is over-performing. Output across water, energy and transport peaked in 2023, totalling £34bn, at least 50% above levels of activity seen in 2015. However, even though industry has expanded significantly, it will find itself needing to refocus on new sectors as workload transitions from roads and rail to networks funded by the private sector, including the power grid and the water industry.
Depending on final settlements with regulators, this shift may result in an increase to the risk exposure of the construction supply chain, with both network owners and regulators focused on keeping customer charges as low as possible.
Future pipeline
The outlook is simultaneously positive and uncertain. With new control periods commencing in road, rail and the regulated utilities, there should be a solid foundation of demand. However, both public and private sector clients are under pressure. For future road and rail programmes, HM Treasury will confirm the size of the long-term investment pot only once it has completed a comprehensive spending review and has reviewed fiscal rules.
With existing projects like HS2 taking their share, and with protected programmes like the Aukus nuclear deterrent being prioritised, government may scale back other parts of the public sector capital programme. Assuming that projects are investable, the private sector pipeline should be more certain, although this may in time result in higher customer bills. The combination of increased workload, limited industry capacity and higher costs of capital is likely to result in difficult trade-offs for both the utilities and their regulators.
Planning currently plays a significant role in determining the flow of projects. Major reforms are already in play, and more will follow under Labour. However, the future planning pipeline is already overflowing. While only seven schemes are currently in examination, there are a further 69 schemes at the pre-application stage – highlighting the pressure on the Planning Inspectorate and the importance for Labour of completing the planning reform process.
Another consideration is the state of readiness of the pipeline. The Infrastructure and Projects Authority (IPA) last published a review of the pipeline in summer 2023. At the time, infrastructure and construction programmes represented 30% of the public sector’s major projects programme by number and 50% of the cost, totalling £400bn. Only six programmes out of 73 were rated green, but eight were rated red, including the housing infrastructure fund and HS2 phase 2a, which was subsequently cancelled. The IPA’s assessment is that amber projects have significant issues which require the team’s action to ensure deliverability.
Contractor health
Contractor health is of course an important consideration, and contractor performance in the infrastructure sector has bucked the industry’s negative trend since the covid pandemic. Based on the latest Building Top 50 data for example, the average margin secured by the top 10 contractors, all of which have a substantial infrastructure exposure, is 2.3%, compared with 1.3% average for the full 50 – even accounting for substantial losses recorded by one or two leading contractors. Across the supply chain, insolvencies are running at a 15-year high, and once again among the high-profile business failures it has mostly been the contractors focused on building sectors rather than infrastructure which have been most severely affected.
On the surface, prospects look positive. Workload is set to increase, and reforms are already in place to improve the performance of the planning system. However, the perception of the sector has changed, with construction now being more associated with the excessive cost of delivery than with the positive outcomes that investments deliver. The Elizabeth line is an example of a transformative programme that is no longer viewed as a construction success story. Looking towards decades of increased investment, rebuilding the UK construction sector’s reputation as an investable problem-solver will be as important a task as that of attracting new sources of funding..
03 / Improvement opportunities
Whatever the merits of the previous government’s decision to cancel phase 2A of the HS2 programme, the decision and its consequences highlight many of the issues that need to be fixed in order to facilitate the delivery of the UK’s transformative infrastructure programme.
Spiralling costs were what triggered the cancellation of parts of the HS2 programme and a plan for the redistribution of some of the funding. However, the cost issues were symptomatic of deeper issues – including around the planning system, but also concerning objective-setting, maximisation of value and the effectiveness of delivery.
Although performance could potentially be improved on a project-by-project basis, a broader industry transformation is unlikely to take hold before the project pipeline becomes more investable and more certain. It is a circular problem, and action at both programme and portfolio levels is needed to bring efficient projects to market and to enable the supply chain to build effective capacity.
04 / Programme-level initiatives
Recent analysis by Boston Consulting Group (BCG), based on a large global dataset of projects, highlights that the UK delivers expensive projects slowly – matching the US and Australia for cost, but delivering at the slower pace associated with Europe.
Although delays and cost overruns are common across BCG’s database, the UK is an outlier with respect to both the frequency and impact of overruns.
Contributors to poor performance
BCG identifies six characteristics of programmes delivered in the UK that drive inferior performance:
- Multiple, conflicting, and ambiguous programme objectives These typically add complexity and cost and may change when challenged, resulting in further cost and delay.
- Poor value in converting programme outcomes into the scope and specification Risk aversion leads to over-specification rather than development of the minimum viable product that meets the basic requirements only.
- Overly complex planning processes Multiple routes of veto result in a risk-averse approach to scheme development and consultation and a long drawn-out process.
- Poorly focused risk management Contract strategies relying on risk transfer to deliver certain outcomes fail to deliver either the most efficient solutions or the hoped-for certainty.
- Sub-optimal design and construction This results from a tendency to start construction activities too early, even on schemes delayed by planning. An investment in more time for ground investigation and detailed design should result in a better, lower-cost solution.
- Reliance on a fragmented and sub-scale supply chain This is the natural consequence of an industry that cannot rely on its forward pipeline to invest in capability or capacity.
BCG’s ultimate conclusion is that risk aversion across the programme lifecycle has unintentionally created more even risk exposure. Sources range from politicians with short-term objectives determining programme objectives to contractors passing demand risk down the supply chain. Potential solutions go beyond fixing the planning system to focus on eliminating risk sources, for example by promoting better client behaviours, or by eliminating rather than transferring major risk. This will require much greater resourcing of early risk management activities than is currently the case on major programmes.
Other commentators have produced similar findings. Global Infrastructure Hub (GIH), for example, observed in 2021 that 67% of cost overruns are triggered by steps taken before a contract award. GIH highlighted the challenge of high levels of demand and project complexity that are faced in the UK. It advocates a “go slow to go fast” model, combining collaborative and progressive contracting with a flexible approach to risk allocation and accounting.
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By contrast, the IPA’s summary of lessons learnt from transport programmes (2019) highlighted other important traits, including the matching of leadership team capabilities to the technical content of a programme as it evolves. Furthermore, the IPA highlighted the vital importance of systems integration and the need to protect schedule and benefits as part of change and risk management culture.
A similar review of the Elizabeth line also highlighted the increasing complexity of systems integration and the critical role of the operator. As infrastructure programmes continue to evolve from civil engineering to become a hybrid, integrating complex technologies, these lessons will become even more relevant and the project-level critical success factors more important.
05 / Portfolio-level initiatives
The CLC’s recent work on productivity emphasises the importance of pre-construction stages that enable an integrated client and supply chain team to fully contribute to project outcomes. The CLC also recommends actions focused on the construction phase, including consideration of the role of a multiskilled workforce, better quality control and measures to increase ease of doing business for SMEs. However, these interventions deliver much lower levels of benefit.
The CLC’s analysis is more focused on getting the portfolio right, with over 65% of potential productivity gains to be derived from actions at the preliminary stages of programme preparation.
- Fixing the planning system – by reducing the complexity of the process, increasing certainty of outcome and facilitating necessary change. Many steps have already been taken, and Labour has already highlighted its determination to fix the system. There are precedents from Europe and the US showing how to limit some environmental regulations for net zero projects on a “least bad option” basis.
- Use of early integrated teams at a programme level to develop and agree optimal solutions – with front-end loading of effort focused on progressive reduction of change.
- Programmatic delivery, backed by long-term workload – enabling investment in skills, process and innovation.
- Design for operation focused on the best-value solution – facilitated by data to provide design input and assurance, and feedback from operational assets.
Leadership skills are another portfolio-wide opportunity. The IPA has delivered its Major Programme Leadership Academy (MPLA) for over 10 years, with 1,000 graduates having passed through it. Inevitably, much of the focus for the project sponsor is on understanding and navigating the full range of risks involved in delivering the programme, but also on the importance of leading the transformation over the long term.
As highlighted in Arcadis’ review of the enterprise model in procurement, clients in a leadership role have a critical task in establishing the culture and standards of an organisation, highlighting the importance of creating a cadre of highly skilled managers.
06 / What comes first: Workload or transformation?
With ambitious plans to decarbonise the grid and boost housing delivery, Labour needs to hit the ground running with its plans for the transformation of infrastructure delivery. Given the targets and deadlines that it has already set, there is no time to spare. With many demand-side initiatives already outlined – including planning reforms and using Great British Energy to crowd funding into renewables – it is conceivable that activity could ramp up even faster than forecast, particularly if the chancellor benefits from a more positive assessment of growth prospects by the Office for Budget Responsibility.
But as has been highlighted in this review, construction’s challenges go much deeper than issues on the demand side. There is a risk that the future could see more work being “pushed through the same pipe”, with attendant risks of baking existing below-par practice into a new wave of capital investment. Similarly, constraints across the supply chain might run the risk of repeating the inflationary cycle experienced in 2021 and 2022.
Labour’s planned review of current projects will help to identify why there has been a shortfall between planned and actual performance, and why previous reform initiatives including the Public Sector Playbook and Project 13 have so far had only a limited impact on performance.
The proposed merger of the IPA and the NIC into the National Infrastructure and Service Transformation Authority could provide much better oversight and assurance to ensure that projects proceed only once judged fit to deliver, but the proposed body will only be able to serve this function with an expanded and suitably experienced cadre of project experts – experts who could also potentially be leading the delivery of programmes.
To break the vicious cycle of poor productivity, it might be necessary to “go slow to go fast” – in particular by ensuring programmes at an advanced stage of development have absorbed lessons learnt and have made necessary changes to objectives, culture and organisation that will avoid some of the problems faced in recent years. This means that any proposed programme review could usefully include new schemes in advance of their investment decision, as well as those in flight. Given the tendency of programmes to jump into solution mode, a second opinion could be a useful step.
The creation of a pipeline of investable programmes also needs long-term action. The proposed 10-year infrastructure strategy could form the basis for this pipeline, but only if clients and industry follow the plan and if schemes are deliverable. Planning reform is important – simplifying the process, reducing durations and increasing certainty, but also facilitating post‑consent change, enabling the full project team to contribute to scheme optimisation.
But planning is only one part of the demand side, and a step change in funding arrangements is also needed. Ensuring that the public sector spends allocated funds will be a good first step and will give the supply chain greater confidence in the status, credibility and investability of the infrastructure sector. However, with most of the future finance coming from the private sector, funding models should include some sharing of risk in order to attract capital and to counter the risk aversion in procurement that is the root cause of many of the sector’s problems.
Looking forward, infrastructure investment in the UK is set to transform as private financed network and energy schemes become the main source of new workload. The UK must compete for this investment, and improving our delivery performance will play a key role in making the UK an attractive destination for long-term capital. In addition to its role of being a great client on its public sector programme, the government will need to give clients in the private sector the space and flexibility to be great clients also.
With growth and the net zero agenda at the heart of Labour policy, construction’s contribution will once again be in the spotlight.