CEF/BDO State of Trade Survey Results, H1 2018

The latest half-yearly State of Trade survey with our Patronage partners BDO Northern Ireland has been published today.

Overall sentiment

  • There is a continued frustration at the lack of an NI Executive to make key decisions for the industry - in terms of what businesses felt was the most critical development to aid future success, 65% felt the restoration of Stormont Executive was number one
  • Much like the last six months of 2017 of those businesses who currently work for the public sector, the majority did  not expect to see growth in this area in the next twelve  months
  • Profit margins compared to the previous year have largely been stagnant, with 55% indicating they have stayed the same (positive news on the context of rising costs and labour shortages) and 12% indicating their margins have got slightly better and 25% slightly worse
  • Unsurprisingly, costs in labour, materials and plant costs were up from 2017, with materials increasing for 91% of businesses and labour costs increasing for 87% of businesses
  • Expectations for the construction industry over the next 12 months is generally flat, with pessimism slightly outweighing optimism on the immediate future of the industry
  • These expectations are flipped when asked about expectations for the industry outside of NI with 39% expecting things to get at least a little better
  • Confidence in individual goals however makes for more optimistic reading, aligning with the most recent QES results which indicated that two-thirds of members expected their own business/organisation to grow during 2018
  • Expectations on future workforce has shown some relatively positive results, with 39% of businesses expecting a growth in their workforce - however this is heavily caveated with the growing shortage of the required labour.

Capitalising on missed opportunities

In Feb 2018 more than one quarter of firms (28.3%) were capitalising or preparing for opportunities in off-site construction. An almost identical number said they were aware of or had claimed R&D tax relief for costs incurred in the process. We asked the question at the time, were the other 71% missing these advantages to aid the development of their businesses?

Has this changed in the last six months? Of those surveyed 34% were now capitalising on or preparing for opportunities in off-site construction, a steady increase of 6.5% on the previous half-year results. There was a bigger increase in those businesses who had availed or were aware of R&D tax relief for costs associated with this process, 45.65%, compared to 28% six months ago – lessons definitely learned.

Key findings

Business performance and confidence

  • More than half of respondents highlighted either growth in turnover or increased profitability as their main priority over the next twelve months
  • Half of respondents expect profit margins to remain the same in the year ahead
  • Increases in workforce are expected for 39% of businesses
  • Increases in labour and material costs are being felt by almost all businesses (91% material costs, 87% labour with an increase plant costs for 74%)
  • 19% of respondents expect the NI construction industry to remain static in the year ahead, this is a considerable drop from the previous six months where 37.74% expected it to remain static
  • There has been a growth however in those who feel it will deteriorate with 34% compared to 26% in the previous survey.

Capacity

  • Effective capacity is the maximum amount of work that an organization is capable of completing in a given period due to constraints such as quality problems, delays, material handling etc
  • Over 60% of businesses worked at full or almost full capacity in the last six months
  • Only 10% indicated their organisation worked to less than 50% capacity. 

Skilled labour

  • Labour shortages has been quoted as a concern going into the next twelve months for the industry as a whole
  • Competition of higher wages being offered in Dublin, England and Scotland are adding further pressures to labour resources available in NI
  • Limited number of apprentices coming through putting further pressure on the industry.

Brexit

  • Almost a third of companies (34%) have commenced planning for the impact of Brexit
  • There is optimism amongst businesses that the UK will stay in the current Customs Union with the EU or agree a new Customs Union/Partnership with 48% confident this will happen
  • Brexit does not feature as the number one ‘critical’ issue that will determine the future growth of the industry over the next twelve months, with only 12% identifying it as the number one issue (65% restoration of Executive and 14% availability of funding).

Other challenges

  • The vast majority of respondents agree or strongly agree that the continued failure to form a Stormont Executive has resulted in a loss of capital projects/tenders (82%)
  • Almost two-thirds of firms (60%) believe a lack of finance in the sector is affecting their business – this is slightly down on the previous six months (64%).

 

Commentary

Sean Lavery, Partner at BDO Northern Ireland said:

“The performance of our construction industry has largely hinged on hands-on management, mitigation of risk and making smart decisions. The half-year survey demonstrates that many of our construction firms are continuing to take this approach in the face of many challenges.

“The availability of funding is a major issue for many, with lending institutions sighting the construction industry as a higher risk. This lack of funding combined with the absence of an NI Executive is a critical area of concern for the industry with a number of major infrastructure projects delayed and departments unable to approve projects that have funding already allocated. We need to see some clarity going forward in who can make decisions, which will allow these public sector infrastructure projects to commence. 

“From the respondents there is however a sense of cautious optimism, with many of our businesses confident of growth in their own organisation, specifically around expected increases in recruitment. This is caveated with the challenge in attracting both skilled and unskilled labour to NI, particularly with the competitive rates in salary currently being offered in ROI. It is imperative that we are able to attract workers who will not only work but also live in NI, contributing to the local economy.

“However, it is clear that the industry is continuing to be resilient, with the prioritisation of growth a key indicator of this. This survey provides demonstrable proof that our local businesses are confident in their pursuit of success, however for the long term they need support in decision making and funding to continue to grow.”

 

John Armstrong, Managing Director of the CEF said:

“The concern expressed within the survey as to the urgent need for a fully functioning NI Executive which can take decisions on infrastructure projects large and small is reinforced by the current iteration of the Northern Ireland Executive Departments Procurement Pipeline.

“With only 59 schemes in-procurement at the mid-point in the financial year, there is a crisis point coming within the industry. When we also consider that the public sector capital budget is at its highest point since 2007 and several high-profile Executive Flagship schemes are not running to their initial financial plan, there should be an abundance of opportunities for contractors to tender for public works.

“This is far from the reality however and when added to the uncertainties of Brexit and rising costs across the board, many of the companies we surveyed now have legitimate concerns as to their forward work pipeline. This is incredibly frustrating given the cautious optimism that many firms had detailed in the survey, so focused as they are on growth and increasing employment.

“From our industry’s perspective it is now very clear, to prevent this looming crisis point, the Secretary of State must take action and we await the legislation that has been promised being published”.