The UK’s “highly fragmented” construction industry is a key factor in the huge costs of major projects, the National Infrastructure Commission (NIC) has said. 

The independent public body urged the government to commit to a future infrastructure pipeline to encourage consolidation. It added that problems with consenting, design and risk management were also to blame for large-scale project costs being “too high”. 

In a report published on Thursday (10 October), the NIC says the UK has a “long tail of poorly performing projects” – particularly in the nuclear, rail electrification and high-speed rail sectors – and that cost savings of between 10 and 25 per cent could be made. 

One reason it gives for the high cost of infrastructure is the relatively high number and small size of construction companies involved in building infrastructure compared with those in other countries – a situation it says “creates problems for delivery”. 

“An uncertain investment environment without a clear pipeline of projects has reshaped the structure of the UK’s infrastructure construction sector,” it says.

“UK tier one firms tend to rely on subcontractors to deliver projects […] rather than maintaining their own permanent workforce in the context of an uncertain pipeline of future work.”

The report says tier one contractors typically employ between 50 and 70 subcontractors on an infrastructure project, while almost 90 per cent of the roughly 23,000 civil engineering companies in the UK employ fewer than eight people. 

“The fragmented nature of the system, while reducing risk for individual firms, creates additional risks and inefficiencies for projects,” the report continues. “The more actors there are in the system, the greater assurance costs are likely to be. 

“In a fragmented system, subcontractors will need to manage risk through assuring the work of their contractors, such as ensuring the designs they have been given are deliverable when construction is separated from design. 

“Further inefficiencies arise as firms do not benefit from economies of scale in their overhead costs. Firms also have to establish ways of working with each other, rather than building on already established common working practices.” 

The NIC says that while overseas tier one contractors do build some UK infrastructure, they have “largely responded to market conditions in the UK and adopted the same fragmented model as incumbent firms”. 

It concludes: “While greater competition in the construction sector can drive down costs, current levels of fragmentation restrict potentially transformative alternative business models from establishing in the UK.”

Fragmentation and the dynamics of the UK construction market also make effective procurement difficult, according to the NIC, as different tiers of contractors respond to different incentives. 

“In the UK the commercial model of tier one contractors means they respond to revenue incentives, while lower tiers are focused on the promise of future work. This makes it challenging to design incentives which motivate all parts of the construction supply chain,” it says.

“Similarly, clients will need to determine the appropriate size of work contracts. If works are broken up into several small contracts, then the client can face greater ‘interface risk’ from the frictions between different contracts. Conversely, if works are packaged into contracts which are too large, there is a risk that few or no contractors will bid, because the contract carries too much risk relative to the overall size of their balance sheet.” 

The NIC report adds that long-term problems with productivity are “partly a result of the lack of long-term strategic direction in the system”, saying: “A clear and consistent pipeline of projects would encourage investment in one-off costs which deliver outturn cost reductions across a pipeline of projects.” 

Elsewhere in its report, the NIC says issues with project planning and design are also responsible for the high cost of infrastructure in the UK. It notes that “construction outturn costs in the UK have risen by around 30 per cent more than GDP per capita since 2007”.