More from: Contractors File 2008: A rise before a fall?
Twenty years ago, if you asked anyone outside the industry “what do civil engineering contractors do?” like as not the answer would have been “they build roads, don’t they?”
And at that time it also seemed it was the trend – in and outlook for – road construction that was the principal determinant of optimism across the whole industry. Not any more; road construction has declined in importance, and more than ever before its prospects are uncertain.
The latest full-year data for construction output puts the value of new road construction work at just under £1.9bn, 25% less than the 2002 figure of just over £2.5bn. Assuming the price of road construction has moved in line with that of all new infrastructure work, the fall in the annual volume of road construction new work in those five years was 50%.
There was also a significant downturn in the volume of highway maintenance. For England the government is keen to point to the increase it has made in allocations to local authorities for capital expenditure on maintenance, but this has not made up for the steady erosion of the value of current expenditure allocations for routine maintenance.
The downswing in road construction and maintenance may now have come to an end. The output statistics appear to be bottoming out.
The January and April 2008 Civil Engineering Contractors Association (CECA) workload trends surveys recorded the first positive results for five years for contractors’ work on motorways and trunk roads. In April the result for work on local roads also was narrowly positive. But how long will this improvement be sustained?
Don’t be fooled by the sharp spike in new orders for road construction
in February, which consisted largely of the contract for completion of the M74 motorway into Glasgow, or by the rise in this year’s budget for expenditure on major road construction and improvement schemes in England shown in the Highways Agency’s Business Plan 2008/9.
Looking a bit further ahead, the Business Plan not only fails to refresh the Agency’s programme of major schemes, but casts doubt on a string of previously approved motorway widening projects for which alternative hard shoulder running options are now being considered.
This is not the only doubtful element in the outlook for major civil engineering projects, which arguably is more uncertain now than at any time in the past 20 years.
Network Rail has ambitious plans for national rail network enhancements, which could turn it into the industry’s largest single client. But that depends on winning approval for its plans from the Office of Rail Regulation and from the government.
Water companies in England and Wales are close to the point at which they will submit their draft business plans for the period 2010-15 but there can be no firming up of their water and sewerage works investment programmes for those five years until Ofwat completes its price limit deliberations in 2009.
Looking at other sectors of the market for civil engineering contractors’ services, the outlook is equally uncertain.
But where changed economic conditions have their most immediate effect is in that sector of the market that comprises the wide variety of works carried out by civil engineering contractors to prepare for building developments.
This is a sector that has grown in importance with increased use of brownfield sites, often requiring extensive remediation ahead of their reuse.
When the CECA survey of civil engineering workload trends was launched in 1997 it was decided to ask contractors to report not only how their total workload and total order books had changed over the previous 12 months but also what changes there had been in respect of 10 principal types of work. These include site works for housebuilders and developers.
Through 2006 and 2007 the sequence of results for the change in total workload was the strongest in the history of the CECA survey.
In January and April 2008, however, alongside indications of improvement in some other sectors including road works, the trend for site works slumped. For all respondents of all sizes and in all parts of Great Britain the latest survey results are still positive, for the change in work and the change in order books. For small contractors, however, most notably in the north of England, those reporting a fall now outnumber those reporting an increase in this type of work – something that is very clearly linked to the so-called “credit crunch”.
Jim Turner is CECA’s economic advisor