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The Business and Economic Environment

The Construction Industry
Generating about 8% of the UK’s economic output and employing over 2 million workers

a diverse range of occupations, construction is one of the UK’s largest industries and is

an essential prerequisite for all other economic activity. Combined employment of

construction workers

and professionals accounts for 8% of the UK workforce.

Total employment within the ConstructionSkills’ footprint consists of 1.7 million who work

in construction and contracting (SIC 45 excluding SIC 45.31 and SIC45.33) together

with a further 326,000

who are employed in the Professional Services sector (SIC 74.20).

The majority of employees across the UK (i.e. those in direct employment) for

both contractors

and professionals work within mid-sized (10-250 employees) companies. However,

most

companies in both categories are small, with roughly 90% employing less than

10 employees.

Furthermore, 767,000 people working within the ConstructionSkills’ footprint are self-
employed, representing over a third (38%) of the available labour in the contracting sector.

Figure 1 Employment within ConstructionSkills’ Footprint, United Kingdom: 2005

Size of Enterprise Enterprises Employment

Number Percent Number Percent
(Number of Employees)

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 With no employees 767,090 86 767,090 38
1-9 103,810 12 391,045 19
10-49 13,785 2 293,285 14
50-249 1,835 0 183,440 9
250+ 340 0.04 394,340 19
Total 886,860 100 2,029,200 100
Source: Small Business Service Analytical Unit 2005; Office for National Statistics,
Labour Force Survey 2005; ConstructionSkills

Note: "With no employees" comprises sole proprietorships and partnerships comprising

self-employed, owner-manager(s), and companies comprising only an employee

However, self-employment in the four main craft trades (wood trades, bricklaying,
plastering and

painting & decorating) accounts for over 60% of their total employment across the UK.

comparison self-employment within the Professional Services sector is less widespread,

accountin

for about a quarter (27%)

of the workforce and being very much focussed around the activities of architects and
chartered surveyors.

Source: Office for National Statistics, Labour Force Survey 2005

In terms of occupational structure, manual workers dominate, representing 60% of the

total workforce. The remaining 40% are non-manual workers, including managers, and

all those working in the Professional Services sector.

Source: Office for National Statistics, Labour Force Survey 2005; Construction Skills

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 Network Model; Experian

Notes: Professional Services (SIC 74.2) consists Architects, Quantity Surveyors

Consulting and Design Engineers and Planners. Engineering, IT and other

professionals refers to those working for building contractors, as defined by SIC 45. Non
construction Workers refers to those working in construction (as defined by SIC 45 & SIC 74.2)

2.2 Construction Economic Activity

Construction output has been experiencing its longest period of sustained growth since

post war construction boom and remained steady in 2005 despite low growth forecasts

wider economy. Whilst reflecting a broadly similar pattern to 2004 at year-end,

contractors output stood at £81.5bn, reflecting a fall of around half a percent on the

previous year, the first such fall since 1994. It is estimated that the output of construction

Professional Services firms generate an additional output which,

based on projections of the latest available data is likely to be in the region of £17 billion

- making construction overall a £100 billion sector.

Source: Department of Trade and Industry (DTI), Department of Finance and Personnel
Northern Ireland (DFPNI); Experian

Much of the activity in 2005 was sustained by the Repair and Maintenance (R&M)

particularly Public Non-residential (up 5%) and Private Non-residential (up 0.5%). New

slowed, falling by 1% compared with 2004, with considerably less output from Public

Non-residential (down 9%), Infrastructure (down 7%) and Public Housing (down 5%).

The only exceptions to this

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 downward trend in new work were Industrial (up 6%) and Private Housing (up 4%), the

perhaps indicative of the recent reversal in the decline of manufacturing. The

Commercial market exhibited some signs of improvement (up 1%), but essentially
remained static.

Whilst contracting and building firms work to service all of the types of demand

mentioned above, Professional Services firms exhibit a different balance, largely

because of their lower level of involvement in

the Repair and Maintenance market. The most recent and available research shows that
new work accounts for 60% of professionals fee income and refurbishment accounts for 28%.

Only 12% of professional fee income is generated in the R&M sector. The significant

differences in the patterns of demand created for

contracting and Professional Services is under constant scrutiny by ConstructionSkills

and is a key

element of the work of the Construction Skills Network.

Source: Department of Trade and Industry (DTI), Department of Finance and Personnel
Northern

Ireland (DFPNI), ConstructionSkills

The slight decline in annual output that affected both contractors and professionals was

surprising when set against the political and economic uncertainty that was thought
presentthr

much of 2005 (and indeed into 2006). The economic performance of the whole industry

affected by Government investments delivering near the end of term in the first half of
the year,

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 the slowing housing market, and a slowdown in consumer spending, and increasing fuel

and energy prices during the latter half of the year.

In contrast to the decline in output during 2005, new orders increased throughout the
year and were up 7% compared to 2004. This trend has been maintained throughout the first half

with Government-sponsored work buoying demand. Orders in the twelve months to

rose by 8% compared with the previous twelve months, and orders in the three

months to June 2006 rose by 6% compared to the previous three months, with

increases in all sectors except Public Non-

housing (excluding Infrastructure) and Private Industrial. The impact of new orders

tends to be felt by Professional Services firms early in the process, which will be lagged

and reflected by increases in contractors output throughout 2006 and 2007.

The early signs are that Public and Private Housing together with Private Commercial
could well

drive industry performance in the latter half of 2006. However, Professional Services

firms are likely

to gain more from the latter, helped by Private Industrial and Infrastructure, which are

also showing encouraging but uneven signs of improvement.

In terms of output and new orders the first half of 2006 has exhibited modest signs of
improven improvement

reflecting renewed commitment by the Government to improve public services, and a

continued confidence in the

economy driving corporate investment and consumer spending. Overall the early signs
are the 20are that 2006

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 should be a better year for the UK economy than 2005, with healthier consumer demand

driving growth

and continued recovery in housing market. This is visible in the construction output
figures for the second quarter of 2006, which show that total volume of construction output whilst

unchanged compared to the previous year increased by 1% in the second quarter of

2006. Also, the value (in current prices) of construction output increased 4% compared

to the previous year and increased 1% in the second quarter of 2006.

Industry growth rates for 2005 were somewhat disappointing, but at 3% the forecast rate

for 2006 is above the national average predicted for the same period (2.2%).

This presents a good scenario for the industry overall.

The industry view is that Government investment should reverse the decline

in output experienced in

2005. The Construction Confederation and the Construction Products Association

report that building

contractors are optimistic about prospects for 2006 and beyond with 30% of firms

reporting that output in the second quarter of 2006 was up compared to the first quarter.

The majority of indicators suggest that Government public spending and a strong

economy underpinned by increased consumer confidence is key to industry success in

the short to medium-term. This will have a positive influence on the prospects of both

contracting and Professional Services firms.

2.3 Drivers for Change

Construction specific drivers will inevitably influence and be influenced by wider political,
economic and

technological change. Examples include demographic pressures, broad UK immigration

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 policies, wider

EU directives, future moves toward a more knowledge/service economy, welfare to

work policies etc. Government may also have a more direct impact on construction skills
demand and supply in the future through

the extent and form of public procurement.

However, ConstructionSkills has confirmed that the most significant skills issues across
its footprint are:

 The current skills profile having a negative impact on construction

 industry performance, from craft through to professional,
 management and leadership occupations.
 The risks of the industry adopting a ‘low skills equilibrium’
 inhibiting technological change and productivity improvement.
 The need to generate effective client led demand for improvements
 in quality and business performance – leading to improvements in the skills base
and levels of competence.
 The need to accommodate, understand and provide support for the very different
needs of construction’s various sectors.
 The need to positively respond to the Government’s UK
 Sustainable Development Strategy and make sustainability within construction a

 Balancing the flexibility provided through the industry’s large pool of self
employed labour with the disadvantages and problems caused through a lack of investment in
skills and qualifications.
 The need for effective intelligence to identify and plan for localised shortages
 that may occur in specific regions or occupations, as the industry continues to
operate under conditions approaching Full Employment at the professional, managerial and craft

 The need to redirect the funding targeted at training that does not meet the
minimum requirements the industry expects and to focus limited resources towards Level 2 and 3
 courses. Currently training and courses that do not lead to a qualification which
supports the attainment of a job is prevalent.
 The need to ‘Change the Face’ of construction and recruit people from outside
 the industry’s typical demographic – women and ethnic minorities are significantly
under represented.
 The need to get more employers engaged in training and the lack of suitable
work placements,
 which is placing severe restrictions on the ability of colleges to provide new
 entrants to the
 standards required by the industry.

Ultimately, the long-term concern across all sectors of the industry and in every region of
the UK is to ensure

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 there are sufficient numbers joining to meet forecasts for increased demand (in the
context of improved productivity) and to replace those that are leaving. Consequently, a key
demographic issue is the loss of key skills due to

retirement, and the addition of new skills through recruitment in the lower age groups.

The age profile of the construction industry for both professionals and contractors

alike matches that

of many UK industries. It is mature, ageing and has undergone significant change over
the past 10 years.

For professionals, managerial and manual occupations, the workforce has generally
been distinguished by a decline in the share of the younger age groups in total employment and a
rise in those aged 45 years and over. Despite

positive efforts to encourage young persons to consider the construction as a desirable

career choice at every

level, the industry has an age profile that is significantly biased towards the 30-39 age

The under-representation of women and ethnic minorities remains a priority issue for the
industry, as much in Professional Services as for contracting. 92% of all professionals working for
Professional Services firms are male and in some professions this is as high as 98%.

Labour force statistics show that marginal improvements are being made in the
recruitment from the non traditional female and BME groups. However, when compared with the
UK workforce as a whole, the sector remains amongst the most gender imbalanced in the UK
economy.

Whilst recognising that Government spending may be tight in the short-term, there is a
concern that

vocational qualifications are still not receiving the same levels of Government support

as their academic equivalents. There is the perception that ‘vocational’

qualifications are primarily concerned with the ‘employability’ of

young people and adults, however it is critical to understand and demonstrate that

qualifications in construction are about developing competent people.

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 Making sustainability a reality will require everyone in the supply chain to know what their
role is and to have the skills and knowledge to do it. The sustainability agenda in itself is a driving

force for technological change and

innovation. The development of new products and processes now take into account

environmental

impact, durability and performance, in addition to the more established concerns of

aesthetics, workability and cost.

It is anticipated that continued advances in innovation and technology will to some

degree off-set the decline in the numbers of individuals joining the construction industry; by

enabling a greater outputs from lower inputs. However, if the uptake of innovation does
not gather sufficient momentum – it is currently quite low within the sector – there are clearly
limitations to what can be achieved through such processes.

Consequently, in the short-term (at least) the single largest factor determining whether

the industry is able to

respond to future demand remains the supply of skilled labour.

2.4 Identifying skills needs

To fulfil the mission set within the ConstructionSkills Sector Skills Agreement,

it is essential that ConstructionSkills understand and communicate fully what skills

are needed;where they are needed; when they are needed; and for what they are
needed.

This requires unanimity of understanding amongst stakeholders and partners. It also

requires a single set of comprehensive figures that set out the task and set the targets.

The Construction Skills Network (CSN) is now in a position to answer some of the most

fundamental questions relating to skills capacity accurately, robustly and in a meaningful

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 ConstructionSkills is the industry leader in analysing and forecasting employment and

skills requirements

across the whole of the SSC footprint. There is considerable complexity to overcome,

which is due to the

diversity of the industry structure in terms of the type of work, size of firms and large
fluctuations in the nature,

scale and volatility of demand that is generated locally, regionally and nationally.

Different types of

project link in with and to diverse industry structures and patterns of training supply.

The outputs of the CSN provide considerable detail and can be downloaded from the

web site. Broadly speaking the situation is one in which some parts of the industry are
operating under conditions approaching full employment at the professional, managerial and craft

levels. This comes with some of the associated imperfections and difficulties that
employers find in matching demand with appropriately skilled labour. However, if skills shortages

were major and endemic to the whole industry then it would be identified by the CSN, in
the Labour Market Intelligence and

reported in major industry surveys as a constraint on trade. Wage and tender price
inflation would also be

much more apparent than they are at present. The industry has experienced a tight

labour market for some

time and evidence indicates pockets of skills shortages. However, these tend to be

relatively specific and geographical or occupational in nature.

Source: Department of Trade and Industry (DTI), Construction Forecasting Research,

Federation of Master Builders

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 The CSN models and supporting research do predict hotspots in which localised skills

shortages are likely to occur and alert ConstructionSkills where to take positive action.
Examples

do arise from time to time but forecasting up to 5 five years ahead gives the organization

time to plan. The Olympics, Thames Gateway, meeting the needs of Welsh

Housing Quality Standard and the impact of the Northern Way, are all examples

of areas in which the CSN is identifying where localised skills shortages may occur in

the main trades, specialist occupations and professions, enabling ConstructionSkills to

plan ahead to deal with these.

2.5 Key issues and challenges

Shortages and gaps

Research has indicated that the contracting sector's perception of a skills shortage is

different from that conveyed by several national skills surveys. In such surveys
vacancies are regarded as a skills shortage vacancy if there

are a low number of applicants with the required skills; applicants lack work experience;
and applicants lack

qualifications. However, it is often the case that when construction industry employers

talk of skills shortages they refer to quite specific and short-run recruitment difficulties.
These include not being able to get a particular trade on-

site for a period on a self-employed basis rather than not being able to recruit an actual

vacancy. The situation is similar for architects and other professionals (particularly the
smaller firms), many of whom are working at the limits of

their capacity – providing lead times for those who want to engage their services. In
neither case does this

constitute a skills shortage.

The nature of the workforce

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 The construction industry presents another particular challenge in that

it is served by an itinerant workforce

because of the project-by-project nature of the sector. This means that some
construction sites – especially

large-scale projects - will draw in workers, usually on a sub-contracted basis.

These are likely to be

from other parts of the country, or abroad. Indeed, with self-employment representing
over a third (38%)

of the available industry labour geographic and occupational mobility is high.

The flexibility of such a large pool of self-employed labour offers significant

financial advantages to

clients. The disadvantage however, is the lack of investment in skills and

qualifications by those who are

self-employed. There is a strong tendency for career progression to lead towards self-
employment, particularly in the main construction trades, where the financial rewards are
perceived as being greater. This has obvious implications on the future training of both
the individuals moving to self-employment, and the ability for the industry to provide
sufficient opportunities for those wishing to join the industry.

Balancing migration, mobility and training opportunities

In the case of the Olympics and other major projects throughout the UK we are facing
majoranother major

challenge – addressing the choice of immigration, or training the local/indigenous

workforce. This is also an opportunity, as the focus and intensity of major developments andprovid
projects provides valuable work practice

opportunities. Given the time to plan these can be exploited, enabling local people to

acquire building skills at all levels and become employed in the industry. The use of

qualified migrant labour is a logical and sensible

response to filling peaks in demand on a temporary basis. Given that many migrants

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may return

home when their own economies pick up there is a significant opportunity to skill up
local people

and change the face of construction.

Qualification levels

Skills issues are further complicated by the fact that the contracting part of the industry is

towards lower level qualifications than the overall UK workforce and that employers’

perception of competence is not necessarily consistent with qualifications. Professional

Services firms have generally tended

to be less vocal about skills shortages per se, however there is wide-spread and
consistent concern from employers about the levels of practical experience of applicants,

particularly in terms of graduates not being job ready.

In Great Britain a third of trainees undertake Level 1 VQs but this does not meet the
minimum

requirements the industry expects of its new entrants. Given the capacity restrictions
faced by the industry it would be far more desirable to focus limited resources towards Level 2 and
3 courses and to cut back or abandon

the Level 1 VQ altogether.

Employment, recruitment and capacity

The rate of unemployment in the industry showed little change in the twelve months

to Autumn 2005 and continues to be below the national average at 3.6% compared

to the national average of 4.7%.

The UK wide ConstructionSkills Employer Panel Consultation

Survey of August 2006, which addresses

the needs of professionals as well as contractors, established that finding suitably skilled
staff was

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 second to increasing sales as the most common key business challenge

reported by employers. However,

those reporting recruitment as a major business challenge actually decreased by 5%

from 20% in December 2005 to 15% in August 2006. The challenge of finding suitable skilled staff

applied equally to both construction contractors

(14%) and professionals (16%).

The picture regarding difficulties in recruitment remains a mixed one. Current evidence

suggests that neither

the contracting nor consultancy sectors of industry are significantly short of skilled

workers, to the point of

producing endemic or intractable problems that impact on their ability to deliver.

Whilst there is every reason

to expect that the forecast demand for additional skilled workers will be met during a

time when the industry is

close to capacity, there are concerns from some industry commentators that

construction is becoming too reliant on the supply of migrant workers. They argue that

current patterns of migration are creating an over supply of workers and that this is
impacting negatively on employers’ up-take of training and the opportunities for home-grown
trainees.

In a tight labour market employers want fully skilled and experienced workers, but
logistically this is difficult

when the supply of newly trained labour is determined by the flow from further and higher
education, which is already at full capacity, and where practical experience is difficult to obtain.

Consequently, growing numbers of workers have been drawn into the labour market
from outside the UK as demand has increased.

Overall 6% of employers in both contracting and professional services currently employ

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 employed over the last 6 months a worker who is not a UK citizen, although for

London this increases to

more than two-fifths (22%). It is estimated that non-UK workers account for at least 6%
of the UK

construction workforce, Incidence of migrant employment tends to be proportionately

higher in the Professional Services sector, where many of the companies operate in a

global market and with a workforce

that takes in its permanent overseas offices. Also, many of the activities undertaken by

professionals do lend

themselves to ‘off-shoring’, and is very much enabled by advances in IT and

communications technology.

Consultation with employers has suggested that in many cases the employment

of non-UK workers occurred

as a result of market demand, but without any particular intent. The one notable
exception is that a third (29%)

of Professional Services firms surveyed noted that the good skill levels was a main
reason for employing

non-UK applicants. However, the employment of non-UK workers is not without its

challenges and potential implications for the industry, in particular ensuring that health
and safety standards are achieved and that competency is

evident through recognised qualifications.

The use of non-UK workers appears to have minimised labour inflation, keeping overall

wage increases in the

industry within reasonable limits (keeping the supply of skilled labour in line with

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 demand) and in line with

other industries. In this respect it has provided some relief from any skills shortages that
may have existed.

Ultimately this is not a sustainable solution in terms of encouraging an investment in the

UK labour market.

There is a need to further understand the flow and degree of dependence on migrant
workers. ConstructionSkills is therefore working with recognised experts in the field of international
migration to explore the impacts

of recent trends on the longer term sustainability of industry employment structures.

2.6 Meeting the Demand

UK construction output growth is forecast to average 3%

annually between 2006 and 2010, following a

period of sustained growth that has lasted for over a decade. The industry is in the

throes of delivering some

of the most ambitious building projects in recent times – among them, the Glasgow

Harbour Development, the Welsh social housing renewal programme, continued high
investment in infrastructure and public building programmes in

Northern Ireland, the Thames Gateway, the Government’s massive programme of

school and hospital

renewal and, of course, the 2012 London Olympics. The work of the industry really

is at the heart of nation’s future.

Increases in output are expected across all sectors, with public housing, infrastructure

and commercial activity likely to see the biggest rises. This compares with private

housing and commercial sectors seeing the strongest growth in the previous five years.

Within this, two main shifts are identified that will affect contractors and professionals

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  The first is that private output growth is likely to exceed that of publicly-funded
construction
 between 2006–2010.

o This is largely the result of a resurgence of the commercial sector (offices and retail)

but also due to the

completion of some major public projects and programmes toward the latter part of the
forecasts.

o It contrasts with the previous five years (2000–2005) which saw much faster growth in
publicly-funded

output (91%) than private (52%) for new work, due primarily to large public sector

programmes of investment

in new infrastructure, health, education, social housing renewal and regeneration.

 The second is that growth is expected to shift southwards in the next five years,

contrasting with 2000–2005, which saw generally much stronger growth in the North

of the country than in the South.

o Apart from Northern Ireland, which will benefit from a large public investment

programme over the next 10

years, the strongest growth is predicted for the south-eastern corner of the country,

driven forward by some

very large projects in the offing – the Olympics, the Kings Cross redevelopment, big

ports projects at

Shellhaven, Felixstowe and Harwich, the East London Line extension, and the

Victoria Station redevelopment, to name a few.

o In 2000–2005, regions in the North of the country generally saw stronger

growth than those in the South,

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 particularly the East Midlands, Yorkshire and the Humber and Wales – driven by urban
regeneration projects,

housing, inward investment and creation/relocation of key Government departments and

services.

By the end of 2006 it is estimated that employment within ConstructionSkills’ footprint is

expected to be approaching 2.2 million, and to deliver forecast growth between 2006
and 2010, the number of construction workers in employment is likely to increase by

around 212,000 (roughly 10% above 2006 levels) across the whole of the UK.

This translates into a need for an additional 88,000 new recruits a year on average to

fulfil the requirement created by additional demand and to take account of those who

will leave the industry during the same period.

Within construction as defined by those employed on contracting (SIC 45)

ConstructionSkills forecasts an

annual requirement of 21,000 in the four main trades (Wood Trades, Bricklayers,
Painters and Decorators,

and Plasterers), 15,000 specialists and civil engineering occupations, 10,500 in

management roles and 8,000

in engineering, IT and professional occupations, furthermore an additional 9,000

employees are forecast to be required within the Professional Services sector (SIC 74.2).

Figure 8 Construction Employment and Training Requirement, United Kingdom:

2006-2010

Total Total Average Annual

Occupation Employment 2006Employment 2010Requirement
Management & Clerical 420,670 457,120 19,140
Professional Services (SIC 74.2) 340,450 354,270 9,280
Technical & Professional 183,600 200,150 8,085
Main Trades 509,780 569,870 21,220
Specialists 202,710 225,920 8,670

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Plant & Logistics 81,380 89,410 4,280
Civil Engineering 156,560 170,060 2,900
Non Construction Operatives 277,900 317,810  
Total 2,173,050 2,384,610 73,575
Source: Construction Skills Network Model, 2006; Experian

The relatively large requirement for managerial and professional occupations is

due almost entirely to the

shift in focus towards a process driven industry that requires much more control.

The move to integrate

planning, design and procurement seamlessly into the construction process has

necessarily placed more emphasis on the inputs as well as the outputs.

The need for contractors to understand the concepts of value, quality and

risk has required a greater ability to monitor, measure and analyse the construction

process. This knowledge

and experience can then be used to aid the allocation of resources more effectively,

and to pre-empt and

prevent problems. Consequently, this has resulted in an increased need to invest in

the managerial and

leadership skills of the workforce.

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Office for National Statistics, Labour Force Survey 2005

Professional Services as defined by Office for National Statistics as SIC 74.2 covers all architectural and
engineering activities and related technical consultancy. Occupational groups working within the
Professional Services sector include Architects, Quantity Surveyors, Consulting and Design Engineers and
Planners, and professional disciplines as defined more specifically by the CIC in their regular Professional
Services surveys.

Department of Trade and Industry (DTI), Department of Finance and Personnel Northern Ireland (DFPNI);
Experian

When last measured in 2002 the output of construction Professional Services firms was found to be £13.6
billion (ref, CIC Construction Professional Services Survey, Davis Langdon and Experian, 2003)

Data taken from the CIC Construction Professional Service Survey, 2003. This survey is in the process of
being updated for 2006.

www.constructionskills.net/research/constructionskillsnetwork

Construction Forecasting Research,

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