ÐÇ¿Õ´«Ã½

The construction sector is one of the cornerstones of economic growth. It contributes £142bn to the economy and employs more than three million people. It also creates thousands of career opportunities for young people.

But, despite being part of the fabric of the nation, the industry takes on unprecedented levels of risk for low returns that average around 3%.

Delivering critical infrastructure and facilities such as roads, tunnels, hospitals and schools is a complex process that carries risks. In the five and half years during which we constructed the 1.4km Silvertown Tunnel under the Thames in east London – a record achievement for such a large and complex project –unforeseen global events such as the covid-19 pandemic, the war in Ukraine, hyperinflation and a sharp rise in material costs created enormous challenges and costs that our industry had to absorb.

If we are to deliver on the government’s promised building boom, the terms our industry works under must change

As a result, we have seen a growing number of insolvencies within the sector. Too many firms and suppliers, particularly small and medium-sized businesses, have been driven into insolvency due to unsustainable exposure to risk.

The collapse of ISG was not only devastating for the employees and communities that relied on the firm’s projects but a major setback for our sector.

So, if we are to deliver on the government’s promised building boom, the terms our industry works under must change. Otherwise we will continue to see businesses collapse, with devastating impact for people and communities.

It is no surprise that this uncertain economic environment is deterring many firms from taking on complex infrastructure schemes, leading to less competition and lower quality as a result.

Risk sharing Is key

In order to address these concerns, we need to reconsider the funding model and the way that risk is shared between government, developers and contractors. An equitable model must strike a balance between encouraging private investment and providing contractors with a fair opportunity to succeed.

This requires a system where risk is shared and neither party is left exposed to potentially catastrophic financial consequences. It could mean, for instance, sharing material cost fluctuations between contractors and developers, something that would help to mitigate the risks of volatile market conditions.

Long-term commitments to infrastructure planning are essential

Long-term commitments to infrastructure planning are also essential. The government is expected to release a 10-year infrastructure strategy next month, however our industry really needs to see a 20-year strategy that goes beyond the political cycle of a couple of general elections.

A longer-term outlook would also allow contractors to invest in training and development without fear that the projects they have committed to will be cancelled or revised due to a change in political priorities. Stability in long-term planning also makes it easier to secure finance from private investors who need assurances that projects will remain viable over time.

With industry-wide profit margins already so low, contractors are finding it increasingly difficult to manage the high level of risk without the assurance of reliable payment structures and long-term project commitments. Given these challenges, it is crucial that we find a funding model that is palatable for contractors – one that allows them to take on these projects without the fear of incurring unmanageable risks.

The need for an equitable and sustainable financial framework has never been more urgent

With the government’s ambitious goals and the private sector’s potential role in funding these projects, the need for an equitable and sustainable financial framework has never been more urgent.

As a business, BAM is focused on helping our clients to fully understand true risk allocation across the entire lifecycle of a project, which allows us to strategically manage and mitigate any risks associated with the delivery of large-scale infrastructure or buildings. We do this through early involvement, starting at the design phase.

This approach is critical to minimising delays and unexpected costs. By engaging early, we can influence the design, integrate sustainable construction methods, maintain control over project execution and costs, and proactively address challenges before they escalate.

Incentivising firms to bid and build complex schemes

Attracting contractors to bid on complex schemes requires more than just a fair funding model. It requires a system that incentivises firms to take on these high-risk, high-reward projects. Financial security is critical, but so is a culture of collaboration, innovation and trust between contractors, clients and investors.

Incentives could include performance-based rewards for contractors who deliver projects on time and within budget. These could be in the form of financial bonuses or extended contracts for future work.

>> Also read: The government promises ambition. What’s the key to realising it?

>> Also read: Fast-track to the future with the Planning and Infrastructure Bill

Public sector clients could also offer greater flexibility in contract negotiations, reducing the pressure on contractors by allowing for adjustments in response to unforeseen challenges without penalising them severely. This would help to balance the need for stringent project goals with the reality of the risks involved.

Government-backed schemes which incentivise innovation and sustainability would help to encourage contractors to embrace new technologies, improve efficiency and reduce costs. Offering tax incentives for the use of carbon-reducing technologies, for example, or allowing firms to share in cost savings from early project delivery would encourage firms to think creatively while maintaining a project’s integrity.

Contractors need a system where risks are shared fairly, allowing them to invest confidently in long-term projects

The key to a thriving construction sector lies in finding and agreeing a funding model that is equitable and transparent. Contractors need a system where risks are shared fairly, allowing them to invest confidently in long-term projects.

Partnerships that ensure predictable cash flow, stable funding and an equitable division of risk will help to foster an environment in which contractors feel empowered to take on complex schemes without fear of financial ruin.

Ultimately, the future of the UK’s infrastructure delivery relies on the government and industry working together to create a model that ensures contractors can deliver the  projects the nation needs – but without bearing unmanageable risks or being driven into insolvency.

John Wilkinson is chief operating officer at BAM UK & Ireland