High hopes Irish Construction Market View - Summer 2020 - Arcadis
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High
hopes
Irish Construction
Market View
Summer 2020
Arcadis Irish Construction Market View | Summer 2020 1
Introduction
Ireland’s dynamic • The coalition government formed at the end of June
2020 immediately focused its efforts on drafting the
economy has been plans to aid the post-COVID-19 recovery. The €7bn
July stimulus plan has been revealed; this includes
stopped in its tracks by VAT cuts, a continuance of a wage subsidy scheme,
incentives for home buyers and a package of
measures to boost cash flow for businesses.
COVID-19. Construction, • The Brexit transition period is looming, with the Irish
no stranger to boom and economy arguably being the most exposed to
disruption out of the EU27.
bust, has been one of the • Ireland, like many countries, is now in the process of
exiting lockdown and returning to a “new normal”,
most affected sectors. albeit with all the challenges of driving economic
recovery while keeping a potential second wave of
What are the prospects COVID-19 at bay. The path to recovery will not be
straightforward and is already being interrupted by
as Ireland comes out of recurrences of the virus. This could result in greater
risk aversion, lower business investment and limit
lockdown?
anticipated levels of activity.
• Following two months of strict lockdown, Ireland
has been steadily re-opening the economy. First
signs of improving business sentiment have been
seen with the Central Bank of Ireland’s Business
Cycle Indicator increasing from an all-time low
recorded in April. Challenges remain, especially
around levels of COVID-19 adjusted unemployment*
which by the end of May was still at the level of
26.1% and is expected to decrease to 12.5% only by
the end of Q4 2020.
• *The COVID-19 adjusted monthly unemployment rate assumes that all
claimants of the COVID-19 Pandemic Unemployment Payment (PUP)
2 High hopes would have qualified for the jobseeker’s benefit/jobseeker’s allowance.
• According to the National Accounts data, GDP grew • Most construction sites re-opened in mid-June, but
by 4.6% year-on-year in the first quarter of 2020. At physical distancing requirements set out in the
the moment of writing, the Central Bank of Ireland Construction Industry Federation’s (CIF) Site
presents two possible scenarios regarding the Operating Procedures (SOP) are impacting on
national output – a more positive baseline assumes a productivity, with completion dates pushed out by a
decrease in GDP in 2020 of -9% and subsequent number of months. Housing completions are also
recovery by 5.7% in 2021. In a more severe scenario, expected to decline to 15,000 from the 21,000
the GDP in 2020 falls by -13.8% and grows by 4.9% in achieved in 2019. Given the sector’s recent
2021. The more optimistic scenario assumes the breakneck pace of growth, such a consolidation can
output will only return to its pre-COVID-19 level in be expected to put investment aimed at further
2022. expansion at risk.
• The Irish construction market has been one of • The Irish construction market is known for being
Europe’s hotspots, nearly doubling in volume by over highly cyclical. Rapid growth after 2013 followed a
70% from 2013 to 2019. Most construction sites six-year decline that saw the industry shrink in size
remained shut throughout the lockdown period, by 70%. Steps to protect industry capacity will be
resulting in around 50% of the workforce claiming critical for the long-term recovery. Government,
Pandemic Unemployment Payments at the peak of domestic demand, and international investors will all
the lockdown. In common with many economies, the play a part in sustaining the sector during an
Irish construction sector has been the 3rd sector exceptionally uncertain period.
most hit with job losses, but also one of the quickest • The coalition government has recently published its
to enter recovery when lockdown measures were long-term “Programme for Government: Our shared
eased. future”. Of particular interest to the construction
• Data from The Ulster Bank Construction PMI – which industry are the commitments regarding the
tracks construction activity – returned to just above delivery of Metrolink, Luas expansion, climate action
50.0 at the end of the second quarter, signalling an and sustainability, and increases to social housing
increase, albeit from a very low base. This is a stock by over 50,000 in the next five years. Further
positive development, but recovery to previous details of planned investments will be published this
levels will take some time. autumn.
Arcadis Irish Construction Market View | Summer 2020 3
Basis for
the forecast
This forecast has been prepared as Ireland moves into Looking beyond the restart of existing projects,
phase 3 of Post-COVID-19 recovery, where the risk evidence on the pipeline is sketchy. It was widely
of disruption remains, even as wider sections of the anticipated that Ireland’s dizzy rate of growth would
consumer-facing economy open up. slow during 20/21 and the crisis could well have
accelerated this. By contrast, public sector investment
Construction sites were able to reopen in May after two
is predicted to increase by 10%. This will help, but is
months of near-complete lockdown. The combination
unlikely to compensate for a reduction in the pipeline
of catch-up on delayed works, potential disruption
for commercial and residential sectors.
from new COVID-19 outbreaks and uncertainty with
respect to future workload means that prospects are Forecast
particularly unpredictable. In developing our construction price forecast, we
Clients and contractors who are looking to bring recognise that there are both inflationary and
forward projects over the next year will be only too deflationary factors that will come into play during
aware of new risks associated with health and safety, the recovery. The critical inflationary factors are the
viability, local lockdown, and supply chain stability. The costs associated with social distancing – either related
extent to which new projects can be brought forward to lost productivity or additional costs associated with
will have a big influence on the shape of the recovery extended programmes. As contractors become more
and future market conditions. adept at managing sites under the Site Operating
Procedures, these will be less of a risk. Against these
Baseline - current state of the industry inflationary pressures is the potential for deflation
The Irish construction sector has been one of the most associated with a slowdown in procurement, which will
dynamic European markets in recent years. Strong almost certainly trigger a review of contractors’ pricing
sustained growth since 2013 and rapid price inflation strategy.
has led to strong order books and some recovery in
the profitability and balance sheets of contractors and
their supply chain.
However, in common with the rest of Europe, the
sector has been particularly vulnerable to the impacts
of COVID-19, especially since in Ireland almost all sites
were shut in April and May. Despite this, there are some
positive signs for the Irish economy. Preliminary data
suggests that the economy was still growing in Q1
2020 ahead of shutdown in early March, and the Irish
Economy has a disproportionate exposure to digital
and pharmaceutical businesses that have so far been
the winners in the recovery phase. Whether these tail
winds can sustain demand for construction remains to
be seen.
4 High hopes
Inflationary Deflationary
• Productivity constraints associated with social • Decreased workload as a result of reduced
distancing demand and confidence
• Access to scarce materials, resulting from • Commodity prices
disrupted production
• Reduced demand for labour and materials
• Loss of contractor capacity
• Increased competition for available
• Increased workload once recovery is established opportunities
For the past 2-3 years, construction price inflation has these risks may also help to prevent the scale of price
been increasing at between 6-8% per annum, driven correction seen in the last downturn.
by a combination of scarce resources and a buoyant
This means that the duration of COVID-19-driven
construction market. Unlike almost all construction
disruption will be important in determining price
markets in Europe, in Ireland, there remains some
levels. Our optimistic case is that markets will
inflation pressure that will need to be absorbed before
continue to be periodically disrupted throughout 2020.
prices fall associated with, for example, previously
This is already happening on individual construction
strong labour inflation and the full pricing of risk.
sites. Our pessimistic case is that widespread
This analysis highlights that for the foreseeable future, disruption extends well into 2021 with a significant
there will be some unique market factors that will collateral damage to global and domestic economies
counter the risk of a price-led downward spiral in and a knock-on effect on demand for construction.
response to a disrupted workload. The presence of
Optimistic case Pessimistic case
• COVID-19 outbreaks recur during 2020 • Outlook for COVID-19 control deteriorates
during 2020
• Progress on sites is disrupted periodically during
2020 • Economies continue to be disrupted by
large-scale lockdown during 2020 and 2021
• Governments develop testing and social
distancing infrastructure to reduce need for • Strategies to reduce the need for lockdown
lockdown are less effective than hoped
• Industry capacity mostly retained through • Productivity falls significantly due to multiple
successful government support programmes sources of disruption
• Social distancing reduces the productivity of • Industry capacity is lost as a result of
many sectors including construction widespread industry consolidation
• Investment-led public-sector recovery • Government reduces scope or cancels
programme procured during 2020 in programmes as part of savings
anticipation of 2021 start
Arcadis Irish Construction Market View | Summer 2020 5
Inflation forecast
There are other unknowns that also need to be Prices will be flat in 2020 and could potentially soften
considered. A particularly important issue for the Irish in 2021 if recovery is delayed. From 2022, assuming a
market is how much contractors have learned from the broadly-based economic recovery, prices will start to
Great Financial Crisis, when prices fell by at least 40% rise above the rate of cost inflation, reflecting the long-
in two years. Lessons learned then may encourage term constraints affecting the industry.
contractors to consolidate rather than chase turnover,
Large programmes such as the Dublin Metro will
which will reduce downward pressure on prices.
underpin future workload and prices, but have little
Ultimately it will be behaviours as well as the laws of
to offer in the immediate recovery phase.
supply and demand that determine future price levels.
Our forecast takes the optimistic scenario and blends
inflationary and deflationary factors. We assume that
the promised 10% growth in public sector investment
will be sustained, but that private sector led markets
including housebuilding and commercial development
will take until at least 2022 to recover confidence.
6 High hopes
National
National Infrastructure Construction TPI
Construction TPI
2019 6-8% 5-6%
2020 0% 0%
2021 0-2% 1-2%
2022 3-5% 5-6%
Arcadis Irish Construction Market View | Summer 2020 7
Zoom into:
Arcadis 5-point project
procurement plan
In three months, the Irish Risk awareness is at its peak and the potential for
further disruption related to new waves of infections
construction industry remains. Whoever dares to set up new contracts in
these challenging conditions, will require a flexible
has swung from being approach to risk.
Risks related to lower productivity, COVID-19
one of Europe’s hotspots disruption to works, and supply chain resilience
could result in delays and increases in costs and will
to suffering from post- prompt clients to reconsider their own business needs.
However, let us be clear, delays to projects and an
COVID-19 related aggressive approach to risk transfer by either side
could be damaging both to clients and the supply
uncertainty. chain. A different approach is needed, to make sure
that projects succeed, as well as to ensure the long-
term health of all sides of the industry, including client,
main contractor, and the wider supply chain.
The industry is diverse, with the infrastructure sector
being locked into frameworks, and commercial and
housebuilding sectors being much more responsive to
market trends. While there cannot be a one-size-fits-
all approach to project procurement, there are some
core principles that can be applied across all sectors.
Increasingly we are recognising the urgency of
engaging in collaborative conversations – even very
difficult ones that involve trade-offs and compromise.
Let’s use these challenging times not only to
strengthen the collaborative spirit of the industry
but also to enhance procurement – increasing
transparency as well as embedding some pragmatic
thinking into contracts to increase project resiliency.
8 High hopesOur 5-point procurement plan sets out core principles They will help to define the conditions required
for the effective appointment of project teams in a to maximise the chances for successful
high-risk environment: programme delivery. A good understanding of
the contractor’s baseline position – e.g. price, risk,
1. Consider the portfolio/programme priorities
contract terms – will be useful to identify any
ntil the risk of disruption falls clients should
U additional opportunities needed to incentivise
only consider starting projects that have a the right project behaviours.
strong investment case. Clients should review
4. Design an appropriate procurement event
projects across the portfolio and identify the
highest priorities, for example, those that cannot Even with construction demand likely to fall in
be deferred for safety and service continuity the wake of COVID-19, clients will still need to
reasons. Other projects should be rescheduled in work hard to get the best procurement outcome.
line with their risk profile and investment case. Establish a commercially sound procurement
Confirm that the original project value criteria process that is attractive to bidders. This will ensure
still apply because new factors may need to be an appropriate, managed level of competition.
accounted for. For example, it may now be worth Greater supply chain participation (including
paying a cost premium for assurance around Tier 2) and increased transparency will help to
supply chain resilience if it increases the certainty create a baseline that is sufficiently well-defined
of project delivery. By contrast, clients operating to give confidence to all parties. Be open to new
in the public sector may choose to accept procurement options and innovation, provided the
a changed risk allocation with their normal focus is on simplifying processes and strengthening
supply chain as part of their role in accelerating trust, rather than adding complexity. Consider, for
economic recovery. example, including incentivisation mechanisms in
the contract to increase productivity as COVID-19
restrictions are reduced.
2. Put in place a suitable procurement strategy
Post-COVID-19, the shared interests of contract 5. Manage risks proactively and record the events
parties will need to be optimised. Clients wanting Only the strongest investment propositions
to pursue projects in a riskier environment should be taken to market during the crisis. Any
should consider a holistic strategy that addresses client willing to enter the market in the new and
challenges related to the bidders’ risk appetite, as challenging post-COVID-19 setting should take
well as impacts on the productivity and stability active steps to raise their game to ensure their
of the supply chain. expected return on investment, including:
The knowledge of the underlying position of the • Look for the widest range of opportunities
delivery team can be used by clients to define to proactively manage risks – both established
the balance of risk premium and risk retention and emerging.
they are prepared to accept. Look for ways to
drive commitments to continuous productivity • Ensure that your team has the right skills
improvement from the very outset, through and tools to provide greater control over
design (standardisation and Modern Methods of programme delivery.
Construction), construction process, logistics and • Look to use technology to record events
project management. and analyse them regularly to see how they
compare to the agreed baseline, and what
3. Engage with the supply chain the impact on the time and cost outcome
Having access to a tested and trusted supply could be.
chain has always been a valuable business asset, • Make sure all necessary corrections are
and it is an absolute prerequisite when operating implemented to enable programme
in times of heightened risk. Transparent and continuity across the project.
honest conversations with the supply chain
about impacts on productivity and levels of risk
that contractors are willing to accept will be
particularly important.
Arcadis Irish Construction Market View | Summer 2020 9Spotlight on:
Key factors to a
successful construction
sector recovery
The pre-COVID-19 outlook Now that most construction sites are operational
under the Site Operating Procedures, the sector
for the Irish construction is faced with challenges regarding increased risk,
lower productivity, and extended delivery times. The
industry was very positive, recently formed coalition government is preparing a
National Economic Plan, to be published in Autumn
alongside the Budget. Considering the historic role
with strong demand from of the construction sector in stimulating the wider
economy, an aligned construction-specific recovery
all economic sectors plan will help to ensure that the full benefits of
investments are secured – particularly with respect
including overseas to the delivery of large-scale economic infrastructure
and the creation of capacity to deliver net-zero carbon.
investment. Based on the analysis of the current COVID-19
response in other countries, we have identified
some key factors that such a plan should include to
increase the chances for successful and permanent
construction industry recovery and transformation.
Long-term perspective
When planning for COVID-19 recovery, it is important
to overcome the temptation to focus on “here and
now” only. While immediate actions need to take
place to help cushion the impact of the pandemic,
the mobilisation should be used to lay foundations
for a long-lasting change. Saving jobs and investing
in increased productivity needs to go hand in hand
with the stimulus for more sustainable ways of
working that will help to meet Ireland’s 2030 and
2050 net-zero goals. The momentum created by the
accelerated adoption of digital technologies needs to
be maintained too.
10 High hopesCollaborative effort Accountability
A comprehensive recovery plan requires Actions in the National Economic Plan, big or
engagement of the whole built environment small, should have owners, outcomes and benefits
ecosystem, across all sectors, and should include a clearly identified. Accountability will be important,
wide group of stakeholders, ranging from designers particularly with respect to driving long-term
and contractors, clients, financial institutions, trade programmes associated with net-zero and
associations and standards bodies. An integrated innovation.
approach will mean that the recovery will fire on all
Industry-wide coverage
cylinders. Everyone will have a role to play, either
Tasks in the plan should also differ in size and
by underpinning demand, by creating new capacity,
complexity, aligned to the needs of all parts of
or by enabling the innovation that is necessary to
the sector including Ireland’s very large repair and
improve performance and productivity in the long
maintenance sector, which will play a crucial role
term.
in net-zero retrofit. Simple steps that can be taken
Build on existing programmes quickly to kick-start activity are also vital, balancing
We must build on recent programmes such as sector recovery and longer-term transformation.
the Vacant Site Levy, Home Building Finance
Transformation
Ireland (HBFI), the Land Development Agency
Lastly, it should be made clear that the major
(LDA) and Irish Strategic Investment Fund (ISIF).
objective of the plan is not to recover to the pre-
The government should consider other potential
COVID-19 state, but to push the industry beyond
measures to stimulate development, such as
it. The construction sector can potentially come
reducing development contributions, reducing VAT
out of the COVID-19 crisis on the wave of change,
on works, and incentivizing the use of vacant sites
providing the whole industry ecosystem is able
and the construction of net zero buildings.
to come together, commit and collaborate.
Expectations are high. Whoever decides to
participate, needs to accept that there is no
going back to “the way we used to do it”.
Arcadis Irish Construction Market View | Summer 2020 11Contact
Simon Rawlinson
Head of Strategic Research & Insight
simon.rawlinson@arcadis.com
Agnieszka Krzyzaniak
Market Intelligence Lead
agnieszka.krzyzaniak@arcadis.com
Andrew Beard
Global Head of Cost and
Commercial Management
andrew.beard@arcadis.com
Sabrina Mackin
Market Lead - Ireland
sabrina.mackin@arcadis.com
Arcadis
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Disclaimer
This report is based on market perceptions and research carried out
by Arcadis, as a design and consultancy firm for natural and built
assets. It is for information and illustrative purposes only and nothing
in this report should be relied upon or construed as investment or
financial advice (whether regulated by the Central Bank of Ireland or
otherwise) or information upon which key commercial or corporate
decisions should be taken. While every effort has been made to ensure
the accuracy of the material in this document, Arcadis will not be liable
for any loss or damages incurred through the use of this report.
©2020 Arcadis
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