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MP45018

MAPS COMMERCIAL CONSTRUCTION JANUARY 1998

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

Commercial construction is an important sector of the construction industry. The total value of the market is of the order of £12 billion. This seems set to grow, at an average annual rate of 2 percent, for the next five years to 2002.

Commercial construction work is commissioned by the developers of the public, as well as from those of the private sector. The public sector developers are generally local authorities, central government ministries, or the multitude of departments responsible for a wide range of services. It is clear that the priorities of the private sector are different from those of the public. In terms of construction output, the priorities of the private sectors rest with the construction of offices, shops and places of entertainment, in that order; while those of the public sector are with education and health. The public sector still has an important involvement in office building and in providing entertainment facilities. Under miscellaneous category, there is an extremely wide range of work that is still the responsibility of the public sector agencies, including penal institutions, barracks and other facilities for the forces etc. Market Assessment estimates that in 1997, the value of the output of the construction industry for public sector work, is approximately £ 4.4 billion and for the private sector £8 billion.

In 1997, the public sector spent an estimated £874 million on schools and colleges, £473 million on universities, £966 million on health facilities and £374 million on provision for entertainment. As for the catchall miscellaneous, the public sector spent £855 million. In the same year, the private sector spent an estimated £3.2 billion on offices, £2.1 billion on shops and £1.6 billion on entertainment facilities. Another important sector is that of repair and maintenance of buildings. This includes refurbishment. Market Assessment estimates that the public sector contributed £5.4 billion in 1997, a larger sum than for new builds. The private sector spent £7.5 billion on repairs and maintenance in 1997, only slightly less than the new build total.

The builders and private contractors are on the supply side, of a large and complex industry, that included over 194,000 firms in 1995. Small firms, those defined as having less than eight employees; account for 95 percent of this total. Large firms, with over 300 employees; account for about 0.1 percent of the total. It is generally accepted, that building and development work is carried out by general builders and builders cum civil engineers. In 1995, there were 68,500 general builders, accounting for over 35 percent of the total number of private contractors. Almost 96 percent of these firms had fewer than eight employees and those with more than 300, accounted for less than 1 percent of the total.

The pattern is the same for the builders and civil engineers. In 1995, they accounted for only 3.6 percent of the total number of private contractors. Over 90 percent of them had fewer than eight employees and those with more than 300, again accounted for less than 1 percent.

Another way of assessing their structure is through an analysis, based on the turnover ranges of the firms. Defining the small firm, as one that has a turnover of less than £250,000, means that over 80 percent of the general builders fall within this category. Less than 1 percent would fall into the large firm category, which is deemed to have a turnover of more than £5 million.

For the builders and civil engineers the pattern is somewhat different. More than 62 percent of them, have a turnover of less than £250,000 annually, but almost 5 percent have a turnover in excess of £5 million. Whether they are classified by number of employees, or by their annual turnover, both the builders and the builders and civil engineers, have a large number of very small firms and few large ones.

This wide range in sizes of firms, has an impact on the amount and value of the work that they are able to do. An analytical comparison of the firms, classified according to their number of employees and the value of work done, indicates that in the case of the general builders, 96 percent of the firms were responsible for 46 percent of the total value of work done. The large firms, which accounted for 0.23 percent of the total number, were responsible for nearly 30 percent of the work done, by value. For the builders and civil engineers, it is somewhat different: over 90 percent of the firms, those with fewer than eight employees, are responsible for less than 8 percent of the total value of work done. At the other extreme, the firms with more than 115 employees, representing 1.3 percent of the total, are responsible for over 70 percent of the total value of work done. The larger the firm, the greater the value of the work done.

The developers - the demand side of the market - are divided into those from the public sector and those from the private. The former includes 365 English local authorities, 37 for Wales and 56 for Scotland, as well as all the ministries and central government departments. The value of their orders for new works in 1996, exceeded £2.9 billion, of which over £1 billion is for educational facilities. The value of orders for health facilities, amounted to £674 million and over £419 million is for miscellaneous items. However, in terms of general expenditure on construction and conversion, the amount spent in the financial year 1995-96 was £4.7 billion. The greater part of this is spent in London and the rest of the Southeast.

All the ministries and central government departments, have long lists of projects that they would have built under the Private Finance Initiative, but only a few contracts have so far been awarded and the work has been concentrated in the health and penal sectors. Simplification of the PFI procedures and some form of remuneration for unsuccessful bids would, in the opinion of many builders and developers, go a long way towards increasing the number of PFI projects under construction.

It is estimated that there are about 2,200 private sector developers in the UK, but there is no authoritative record of the exact number. There are about 130 listed in the financial pages of the Financial Times, these include the largest companies that dominate this sector of the industry.

The various statistics available, suggest that there is a relatively large number of very small organisations and a small number of large ones. The only satisfactory way of analysing the sector for size distribution is by turnover, because a firm with a small number of employees may nevertheless, control a very large portfolio of properties. However, these large companies are responsible for most of the development that has taken place in most urban areas and in highly prized locations such as the City of London, the West End of London and Docklands. During the last five years, from 1992 to 1996, the value of their orders to the builders has been increasing at an annual average rate of nearly 11 percent. The total value of orders given in 1996, was £6.4 billion and the cumulative value for the five years taken into consideration was of the order of £26 billion. During 1996, the value of orders for offices was £2.2 billion, between 1992 and 1996; the figure was increasing at an average annual rate of about 6.5 percent. In the case of shops, the value of orders was £1.8 billion; the average annual rate of increase was over 14 percent. For the entertainment sector, the value of orders was £1.4 billion and the average annual rate of increase was over 17 percent.

The total output of the commercial construction industry seems set to grow at an average annual rate of 2 percent to the year 2002. This is in line with the modest, but steady growth, forecast for the economy in general. The forecast for the private sector is higher; an average annual growth rate of 4 percent is anticipated. Although it is expected that office building will grow at less than 1 percent annually, all the other sub-sectors are expected to grow at a much higher rate.

In the case of the public sector, it is expected that overall, there will be a slow decline of about 1.4 percent annually. All of the sub-sectors that comprise the public sector are expected to contract, with the exception of education, where average annual increases of 3 percent are expected, and for health an average increase of 6 percent is forecast.

Text © 1998 MAPS

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