Dr Roni Savage is Managing Director of Jomas Associates
SMEs in the UK construction sector have long been the backbone of economic growth, creating jobs, infrastructure and homes. However, these are particularly challenging times, with businesses dealing with the fallout from Covid, rising costs and rising interest rates. Insolvency rates are on the rise and macroeconomic pressures are affecting many smaller businesses.
Confidence among small construction firms is low, with the Federation of Small Businesses’ latest small business index showing a confidence reading of -7.7 points, the third lowest of all major sectors.
“Construction SMEs face a myriad of challenges, from financial constraints to regulatory hurdles. But with the right policies in place, they can thrive”
So what are the essential policies that SMEs need, not just to survive but to thrive in the construction industry? How will these policies ensure that SMEs can make meaningful contributions to the government’s target of 300,000 new homes per year, which the Department for Housing, Housing and Communities says has not been met? Here are some ideas:
SME construction business strategy
To address some of the pressures on SMEs, a small construction business strategy would bring these businesses into government decision-making.
A meaningful commitment could focus policy proposals on a sector under significant pressures and adjust policy proposals that are marginalizing the sector. This is critical to meeting housing construction goals and economic goals.
Facilitate access to financing
A major obstacle for construction SMEs is limited access to adequate financing. To thrive, SMEs need funding for project execution and working capital, and investment in technology and skills. Policy makers should consider the following steps to make access to finance more accessible for SMEs:
Simplified loan approvals: Simplifying business loan application processes and offering lower interest rates to construction projects would be critical to easing the financial burdens of SMEs.
Public loan guarantees: Providing loan guarantees for construction projects would encourage banks to lend to SMEs with reduced risk.
Fostering the development of skills
Skilled workers are essential to project efficiency and quality. The government could offer training grants, covering both postgraduate and apprenticeship programmes. Encouraging and incentivizing SMEs to hire apprentices and graduates would help address the skills shortage in the sector and foster future talent.
Reduction of the regulatory burden
Excessive regulation can hinder the growth of construction SMEs. To encourage growth, policymakers should seek to simplify and streamline the regulatory environment by:
Planning reforms: Simplifying the planning process for construction projects can reduce delays and minimize costs for SMEs.
Assistance in complying with regulations: Providing guidance and support to SMEs in navigating the regulations would significantly reduce the regulatory burden.
Normalization: The development of standardized industry regulations would simplify compliance.
Improve access to information
Access to market information, procurement opportunities and technological advances is critical for construction SMEs to succeed.
To level the playing field and promote growth, policymakers should seek to establish centralized information hubs, creating platforms where SMEs can access market insights, tender opportunities and emerging technologies.
Promotion of sustainability initiatives
Sustainability has gained prominence in the construction sector, offering SMEs a competitive advantage while contributing to environmental well-being. Sustainability can be fostered by:
Green grants: Provide financial incentives to adopt green building practices.
Certification Support: Facilitating the process of certifying green building practices would open the doors to new projects and markets.
Relief of development of degraded areas: The government is right to identify the high potential of brownfield sites as sites for new homes, but small construction companies need support to overcome the higher costs of reclaiming and developing these areas.
Effective risk management and payment practices
The construction industry inherently carries risks, from cost overruns to delays. Policy makers should support SMEs in managing these risks by:
Insurance support: Facilitating access to affordable construction insurance would help SMEs protect themselves against unforeseen losses.
Efficient dispute resolution mechanisms: Streamlined dispute resolution processes would reduce legal costs and avoid project delays.
Project bank accounts (PBA): A PBA provides a secure mechanism for payments on construction projects. The traditional payment process means subcontractors and suppliers face payment delays or disputes, leading to financial uncertainty. With a PBA, the funds are kept separate
account, reducing the risk of non-payment, insolvency or financial mismanagement. This security is especially important for smaller businesses that may not have the financial reserves to deal with payment delays.
Embracing digital transformation
Technology adoption is essential for construction SMEs to thrive. Policymakers could subsidize technology adoption by providing financial incentives or tax breaks for SMEs to invest in construction technology and drive innovation.
Access to public contracts
Public contracts can be an important source of income for construction SMEs. Policy makers can improve SMEs’ access to these contracts by:
Suspension of the contract: Reserving a portion of government contracts for SMEs can create opportunities for them. It would be of significant benefit if the government reaffirmed its aim that 33 per cent of public procurement money goes to small businesses, and required councils to measure this in their development projects and extend this intention to joint use of land.
Simplified bidding processes: Streamlining the bidding process would further encourage the participation of SMEs government projects.
More than survival
SMEs in the construction industry face a myriad of challenges, from financial constraints to regulatory hurdles. However, with the right policies, they can not only survive, but thrive. As policymakers work to implement these policies, SMEs can continue to drive innovation, provide jobs and contribute to industry growth, strengthening the wider economy in the process. They can become active contributors to a sustainable construction sector that thrives in the face of challenges.
