Construction needs a mission control

Construction had to wait a long time for Rachel Reeves’ first Budget. Not the three months since her black hole revelations in July, but a full two years since the autumn statement of 2022. This was when, as part of the recovery from the Liz Truss mini-Budget, Jeremy Hunt set out plans for public sector capital spending to fall in real terms from after the next general election.

There always was a black hole, but it was rarely discussed.

Given this context, Labour’s investment plans are not simply a welcome boost for construction, they are also a reprieve. The OBR’s October 2024 economic and fiscal outlook makes this clear.

The difference between plans for 2025/26 published in March 2024 and those published on Budget day is £13.2bn in additional investment. In practice, Labour’s £100bn investment plan will sustain levels of investment as a share of GDP. Catastrophe has been averted.

There is further good news to come. Labour’s planned 10-year infrastructure strategy will be published in March 2025. Looking forward, regularly updated five-year departmental spending allocations and a fixed frequency for spending reviews will increase transparency and certainty. Investment might not always increase, but it will be more predictable.

But inevitably there are wrinkles – not simply the initial outcry over increased taxes, but more niggling concerns that increased investment might not deliver the desired outcomes.

The OBR’s latest forecast has hardly helped – projecting disappointing GDP and income growth and higher interest rates between now and 2029/30. The impact of a spending splurge should also be a concern. Can government departments really deliver a 2% productivity gain while increasing spending by £52bn in a single year?

Public sector clients face a particular challenge. They have just five months to complete their planning for their 2025/26 investment programmes. For departments like health, education and justice, which will see a double-digit increase in capital spending, are their programmes “shovel-ready”? And is the right kind of industry capacity in place in the right locations?

A rushed investment programme risks delivering sub-optimal outcomes. Yet, with the clock ticking, a fledgling National Infrastructure and Service Transformation Authority (NISTA) and the Office for Value for Money are unlikely to have much opportunity to intervene before the spending imperative kicks in.

Industry capacity will also be a challenge, even as reforms to the planning system and occupational pensions ramp up the pace of investment. Changes to employment law, the minimum wage, capital gains tax and inheritance tax all have the potential to disincentivise participation, investment and growth in a construction sector that is characterised by SMEs and micro-SMEs.

Like the existing VAT threshold, the improved employment allowance, which reduces employers’ national insurance contributions for micro-businesses, is likely to become a barrier to growth.

Any measure affecting the workforce will also be a concern. Future labour scarcity is the key risk underpinning the autumn 2024 Arcadis construction inflation forecast and there were no measures in the Budget to increase either labour availability or productivity.

The industry’s response to an expanding pipeline – either in growing capacity or by increasing prices as a result of scarcity – will play a significant role in determining how big the opportunities are

Confusingly, the Budget announced plans for a crackdown on umbrella companies potentially worth £895m in 2026/27 while simultaneously enhancing the beneficial tax treatment of the self-employed. Combine this with recent changes to the points-based migration system and it is clear that construction’s labour model is being disrupted just as it needs to expand in response to new programmes in water, energy and others.

If I were writing a column for Farmers’ Weekly or another business sector, I could make the same points – concerns about employment, investment and inheritance. However, the construction sector once again finds itself under the microscope for the delivery of millions of homes, the energy transition and the growth programme.

The industry’s response to an expanding pipeline – either in growing capacity or by increasing prices as a result of scarcity – will play a significant role in determining how big the opportunities are – not only with respect to viability for future investment in the private sector but also how far the increased public sector investment will go. Don’t forget,  Reeves’ new fiscal rules will ultimately be a tighter constraint on future borrowing and investment than the set she inherited.

It is this combination of the criticality of investment delivery, the unintended consequences of emerging policy and the problems of coordinating fragmented industries that makes the case for an industry-level mission control – a cross-cutting approach to driving growth and identifying and mitigating barriers to delivery before they are implemented.

Construction would be a good place to start. Of course, our sector is nowhere near as important as the government’s key missions such as kick-starting growth. But there is a risk that construction could become a mission pinch-point – a blocker, rather than an enabler. That is a serious risk.

So, where could a construction “mission control” make a difference? It could look at the planned profile of public sector workload. Does it really make sense to ramp it up so quickly in 2025? Would steady growth deliver better outcomes than a sugar rush? It could also promote cross-sector planning for supply chain capacity using well-established category management models.

Mission control could track project performance and productivity gains. Most important of all, it will need to consider skills and careers. Could it be that the Budget has already undermined the recommendations of the yet to be published review by Mark Farmer into the industry training boards? If that is the case, then an industry-level mission model will become even more urgent.

As an investment-focused sector, the Budget was unquestionably good news for construction. There is more to come if plans for pension reform and the industrial strategies deliver on their promise.

Managing sustainable growth has always been a challenge and, with a simultaneous, mission-driven recovery, the next cycle will be full of opportunity and challenge. Construction’s need for organisation and planning has never been greater.

Simon Rawlinson is a partner at Arcadis