Off-site construction: a step to boosting UK productivity
– Matthew Oakley, Director, WPI Economics
The Chancellor returning to his seat following a fiscal (or, as this time around, non-fiscal) event marks the twice-yearly round of economists and commentators lamenting about the UK’s poor productivity performance. There is good reason for this; despite slightly stronger recent performance, UK productivity post-financial crisis has been (at best) poor, with forecasts from the OBR continually downgraded as predictions of a bounce back have failed to materialise. More broadly, this is not just a post-crisis issue, UK productivity has lagged significantly behind our international competitors for many years.
Figure 1: Successive forecast for productivity growth
While “productivity” is one of those economicky words that we’ve all become cautious of, this matters. The best articulation I’ve heard of the tangible impact of this was from John van Reenen who, during a series of lectures on the UK economy, explained that if the UK were as productive as our major European competitors, we could all take Friday afternoon off without impacting overall economic output. The impact this could have on wellbeing and quality of life would be huge.
Of course, there are questions about the pitfalls of only thinking of living standards and wellbeing in terms of economic “output” and the extent to which traditional measures of productivity are suited to capturing the activity in the public sector and new sectors like FinTech. But, the sentiment is clearly right; getting better and more efficient at what we do is certainly something we should all be aspiring to. Doing so would grow the economy, boost incomes and drive improvements in living standards that have been subdued in the previous decade.
The problem is that despite years of lamentation and promises of policy action, seemingly little has happened. Part of the problem is that many of the solutions are long term; improvements in national infrastructure, the Northern Powerhouse, Crossrail 2 and improvements in technical qualifications will make a difference, but the benefits will be reaped many years in the future. However, there are some things that could be delivered quickly.
Off-site construction is one such solution. The term is used to refer to a range of construction activities that bring together construction processes, components, elements or modules in a factory setting before installation into their final location. A stream of industry and independent reports and case studies from specific projects have shown that the approach can have major advantages over traditional “on-site” approaches. WPI Economics’ recent report with Heathrow demonstrated these, including: fewer contractors on site, quicker and more certain delivery, higher standards and improved health and safety during construction.
Figure 2: Benefits of off-site construction
While the benefits are clear, the most recent estimates suggest that less than 10% of UK construction activity is conducted off-site. Modelling from WPI Economics shows that if this figure increased to 25%, it could be associated with an increase in output per job of 3.6% in the construction sector. In short, a significant boost to productivity in a sector that has lagged wider economic performance for many years.
Given the geographic distribution of expertise in off-site construction, it is also likely that the impacts will be concentrated outside of London. Our conservative estimates suggest that a move to off-site construction would lead to output in regions outside of the capital being £5.5 billion higher than would have otherwise been the case. In cumulative terms, this represents over a £30 billion spur to growth outside of London between 2018 and 2025.
Figure 3: GVA increases associated with a move to increased use of off site methods.
So how can we achieve this? Of course, the private sector has a role. Our work with Heathrow has shown the benefits of their planned approach of using off-site logistics hubs for the construction of the third runway. More and more firms we speak to are recognising the benefits of the approach and innovating to deliver more with less.
But it’s not just about the private sector; Government can and should also play a role. It has already made a start by committing five key investment departments to implementing a presumption in favour of off-site construction from 2019. However, it needs to do more to make sure this is more than just warm words.
A first step to doing this would be setting a clear target that will spur action. Along these lines, as part of the detail of the long-awaited construction sector deal, the Government and construction sector should commit to a target of moving 25% of construction to off-site methods in the next five years. Over the same period, the Government should commit to a target of at least 30% off-site construction in major projects procured. This should be supported by a commitment from the Government to report yearly on the proportion of Government-funded construction that is undertaken off site.
It is clear that, on its own, off-site construction cannot solve the UK’s productivity challenge. But alongside other longer-term interventions, it has a real chance of providing a much-needed boost to the UK economy, particularly in areas outside of the capital. When the Chancellor next stands up for a fiscal event, I hope he pre-empts the productivity hawks and talks about how the Government will support off-site construction to drive a revolution in the sector.
To read our Social Shorthand summarising our findings, please click here.
To read the full off-site construction 2018 update report, please click here.