Augment

Overcoming Challenges and Building a Sustainable Future: Insights for the Isle of Man Construction Industry

Monday 3rd July 2023

Jon Richards

The Isle of Man Construction Industry plays a crucial role in the nation's economic development and societal progress. The latest data from IOM Government suggests the industry contributes 5% of the Island's GDP and employs over 3,300 people. More importantly though, the industry provides homes, commercial buildings and infrastructure, which is key for the long-term future of the Isle of Man.

If we are to significantly grow the population, as government says it wants to do, then there needs to be sufficient housing, schools, healthcare and leisure facilities to name but a few. The population growth needs to be targeted at those that can work to improve the Island's economy and infrastructure - not just those in IT and E-business.

2023 has been a challenging year so far for the industry and there are a number of issues to overcome in the short, medium and long-term. The knock-on effects of lockdowns during the COVID-19 pandemic, which closed construction sites down for extended periods of time, are still being felt now. In this article, we delve into some of the challenges faced and explore how the industry can navigate these hurdles to build a robust and sustainable future.

Material Cost Volatility

The construction industry is grappling with economic uncertainty and an ongoing inflation crisis, resulting in a significant escalation in the cost of building materials. This has created a challenging environment where prices fluctuate frequently, making it difficult to accurately forecast material costs for future projects. Materials such as bricks and insulation have experienced multiple price hikes within a single year, indicating a sustained trend of rising prices that is likely to persist throughout 2023.

The price volatility in the construction materials market is posing real challenges for firms that rely on fixed price quotes for their projects. The unpredictability of material costs is leading to a wide variation in quotes, making it harder for businesses to provide accurate estimates and manage project budgets effectively.

To mitigate the impact of unpredictable material costs, construction firms need to plan meticulously and well in advance. Quotes must be more detailed than ever before, taking into account the potential for significant cost increases. It is advisable to consider inserting contract clauses that account for the possibility of large material price fluctuations.

Some contractors have adopted a strategy of providing fixed labour prices while charging for materials on a cost-plus basis, aiming to mitigate the risk of price volatility. However, customers often resist bearing the burden of such risks. Therefore, it is crucial for businesses to closely monitor project margins to ensure that they are not incurring losses due to material price hikes.
In this challenging environment, construction firms must remain vigilant and proactive in managing material costs. Constantly monitoring the market and adjusting quotes and contract terms accordingly will help mitigate the impact of price fluctuations and safeguard profit margins.

Labour and Skills Shortages

The UK and Isle of Man construction industry is currently facing a significant labour and skills shortage. This issue has been highlighted by the record number of open vacancies reported by the UK Office of National Statistics (ONS) in 2022. With many workers reaching retirement age and positions remaining unfilled, urgent action is needed to address this skills gap. One crucial step is to increase the visibility of diverse roles within the construction sector, particularly among young people and women. Failure to address these shortages promptly could result in severe delays in housing and infrastructure projects.

If the Isle of Man aims to significantly grow its population, the government must consider the profile of individuals it wishes to attract. It is essential to focus on individuals who can contribute to the economy, especially in sectors with high demand for workers. The current work permit system acts as a barrier to entry for the construction industry and others, imposing additional administrative and cost burdens. However, there is hope for improvement, as the government recently issued a work permit reform consultation to address these issues.

Resolving a labour and skill shortage is not a quick or easy task. It requires a long-term strategy to ensure that the next generation of workers can meet the unique demands of the construction industry. Additional funding and support for apprentice schemes can encourage school leavers to enter the industry, while graduate schemes can attract local talent back to the Isle of Man. It is also crucial to maintain adequate and up-to-date training facilities on the island to meet the industry's evolving needs. By implementing these measures, the construction industry can work towards a sustainable solution for addressing the labour and skills shortage.

Adopting Digital Solutions

Digital transformation is a critical factor in the success of the construction industry, a fact that has been further emphasised by the COVID-19 pandemic. However, despite the numerous benefits, adopting digital technologies can be challenging, especially for smaller organisations that may lack the necessary resources and expertise. It's clear that the industry has been slow to embrace the potential that digital solutions offer. Other sectors, such as finance have adopted digital technology to drive efficiency much sooner and are reaping the benefits.

The range of digital technologies available to the construction industry is vast and promising. Project management software, financial analysis tools, digital timesheets, and paperless invoicing are just a few examples of the potential tools that can significantly improve efficiency and productivity. By embracing these technologies, firms can unlock substantial cost and time savings.

However, the successful implementation of digital solutions requires more than just the adoption of new tools. It necessitates upskilling or reskilling the workforce to effectively utilise these technologies and maximise their benefits. Given the complexities of the construction industry, business owners often struggle to find the time to research and evaluate the available options for digital transformation.

Nevertheless, it is crucial to recognise that digital transformation is not merely an option but a necessity for construction firms to thrive in today's competitive landscape. Those who fail to embrace digital technologies will inevitably fall behind their digitally enabled counterparts. To ensure future success, construction companies must prioritise the exploration and adoption of digital solutions, empowering their workforce to leverage these tools effectively.

Cash Flow Issues

Cash flow management is critical for any business, but it is particularly important and problematic for those operating in the construction industry. This is due to the project nature of the work and unique challenges that can disrupt the smooth inflow and outflow of funds. Below are the main issues experienced:

Long Payment Cycles
Clients may delay payments, resulting in a gap between project completion and receipt of funds. This delay can create cash flow constraints, making it challenging to cover immediate expenses such as wages, material costs, and subcontractor payments.

Delayed Project Payments
Projects can face delays in payment due to various factors, including contractual disputes, change orders or client financial difficulties. These delays can have a cascading effect on cash flow, causing difficulties in meeting financial obligations, paying suppliers and subcontractors, and financing ongoing projects.

Uneven Cash Inflows and Outflows
Cash flow tends to be uneven and irregular. Large expenditures, such as material purchases and labour costs, can occur at the start of a project or during specific project phases, while payments from clients may be staggered or delayed to completion. This imbalance between cash inflows and outflows can strain working capital and hinder day-to-day operations.

Cost Overruns and Variations
Construction projects are prone to cost overruns due to unforeseen circumstances (e.g. Manx weather), variations, or delays caused by factors beyond the company's control. These cost overruns can strain cash flow, as additional funds may be required to complete the project while awaiting reimbursement from clients or negotiating the variations.

Here are 7 ways we advise that can help counteract these common construction cash flow issues:

• Improve cash flow forecasting: Utilise cash flow forecasting tools and techniques to anticipate future cash needs, identify potential shortfalls, and take proactive measures to manage cash flow effectively.

• Strengthen financial planning and budgeting: Develop comprehensive financial plans, accurately estimate project costs, and regularly review budgets to ensure proper allocation of funds and identify potential cash flow gaps.

• Streamline invoicing and payment processes: Implement efficient invoicing systems, use electronic invoicing methods, and follow up promptly on overdue payments to expedite cash inflows.

• Monitor project costs and variations closely: Track project expenses, manage variations effectively, and negotiate timely reimbursements from clients to avoid cost overruns that can strain cash flow.

• Establish relationships with financial institutions: Build partnerships with banks or lenders to secure lines of credit or short-term financing options that can bridge cash flow gaps during project delays or payment delays.

• Maintain strong relationships with suppliers and subcontractors: Foster positive relationships with suppliers and subcontractors to negotiate favourable payment terms, discounts, or extended credit, thereby easing cash flow constraints caused by immediate payment obligations.

• Improve payment terms and contracts: Negotiate shorter payment cycles, incentivise prompt payments, and include penalties for late payments in contracts to reduce payment delays.

Sustainability and Waste Management

The are big challenges for waste management and becoming more environmentally friendly. Key challenges include waste generation, limited recycling and reuse, hazardous waste handling, cultural resistance to change, lack of awareness and education, cost considerations, and collaboration in the supply chain.

We all know that construction projects generate substantial amounts of waste, including materials, packaging, and debris. There's often limited recycling or reuse opportunities available due (in part) to the lack of infrastructure on the Island, but also because embracing sustainable practices requires a shift in attitudes and behaviours. There's also the issue of hazardous materials, such as asbestos that requires proper handling, disposal, and adherence to regulations.

Construction projects involve numerous stakeholders, including suppliers, contractors, and subcontractors. Ensuring effective collaboration and coordination among these entities for sustainable waste management and environmental practices can be challenging. Supply chain integration and collaboration are crucial to optimising waste reduction, recycling, and reuse throughout the construction process.

Addressing these challenges requires a multifaceted approach. Government support through regulations, incentives, and infrastructure development is essential. Industry organisations and associations can play a vital role in promoting sustainable practices and providing education and training opportunities. Collaboration among stakeholders across the supply chain is critical to driving innovation, improving waste management practices, and adopting greener technologies.
By collectively addressing these challenges, the IOM construction industry can move towards a more sustainable and environmentally responsible future.

Environmentally Friendly & Energy-Efficiency

There is a significant challenge in meeting climate change targets, such as the Island's net-zero carbon emissions target of 2050. From residential to commercial buildings, the UK's built environment is responsible for 25% of the UK's greenhouse gas emissions. It is clear then that the construction industry can play a crucial role in reducing carbon emissions and combating climate change. To meet targets, it must embrace sustainable construction techniques that minimise energy consumption, reduce CO2 emissions, and promote renewable energy sources. This requires a paradigm shift in the way buildings are designed, constructed, and operated.

Transitioning to environmentally friendly and energy-efficient practices requires upskilling and retraining the construction workforce. Workers need to learn how to install and maintain new systems such as solar panels and heat pumps. Training programs and certifications can equip workers with the necessary skills and knowledge to implement these technologies effectively.

While adopting environmentally friendly and energy-efficient practices is essential, it often comes with increased costs. The upfront investment for renewable energy systems and energy-efficient materials may deter homeowners and developers. The long-term benefits, such as reduced energy bills can outweigh the initial expenses, but it often takes several years to get a positive return on investment.

The IOM Government must play a vital role in facilitating the transition to environmentally friendly construction practices. This includes providing training grants and subsidies to support workforce retraining efforts. Additionally, offering financial incentives such as grants or low-interest loans for homeowners can encourage the adoption of energy-efficient systems. The IOM Department for Enterprise does operate several schemes, such as the Business Energy Saving Scheme (BESS) and Financial Assistance Scheme (FAS), which provide a 5-year interest free loan or a grant for local businesses. Unfortunately, FAS excludes the construction sector and BESS requires a full business plan and 3 years of financial accounts for those wanting a loan over £5,000. We believe the eligibility criteria is excessive and is putting businesses off from applying.

Thankfully the grant schemes in place for residential premises (non-businesses), such as the Green Living Grant, which provides a maximum £5,725 contribution towards eligible works are more inclusive. Expanding the eligibility criteria for existing grants and better advertising them will ensure that a broader portion of the population can benefit from these incentives and enable the Island a much better change of meeting its net-zero target.

Conclusion

Successfully navigating these challenges will be key if the Isle of Man and UK construction industry is to thrive in the short and long term. Some challenges, such as waste management, climate change and labour/skills shortages don't have an easy or short-term fix. They will require time and effective collaboration between government and industry stakeholders. Reform of the work permit process may provide some relief for local workforce shortages, however the labour and skills shortages experienced by the industry are not limited to the Island. Promoting apprentice and graduate schemes and maintaining adequate training facilities is a long-term project but vital.

The good news is that the many of the other challenges can be addressed by implementing various strategies. Cost volatility and its impact on profits can be managed by preparing detailed quotes, inserting contract clauses, and closely monitoring project margins. Cash flow issues can be improved by negotiating changes to supplier payment terms, utilising regular cash flow forecasting, and ensuring the invoice process is streamlined. All of this sounds great, but without utilising the right digital technology, preparing detailed quotes, monitoring margins, cash flow forecasts and invoicing on time can be a massive time burden.

Technology is key, whether it is digital technology to enhance efficiency or building technologies such as off-site prefabricated construction. We believe that construction and trade businesses first and foremost need to adopt more digital technology if they are to continue being competitive and profitable. Those that continue to work predominantly on paper, with outdated systems and manual processes are going to get left behind. Don't let it be you.

If you want to find out more about how Augment can help your construction/trade business, then please feel free to book a call with us or drop us an email.