Utilities facing a contractor crisis
Utilities facing a contractor crisis
Utility companies will need to compete to secure contractor capacity as a huge pipeline of infrastructure projects comes to market. We explore one of the biggest potential obstacles to achieving net zero on time.
Lucinda Dann, features editor
The scale of the problem
Major infrastructure projects in the utilities sector critical to the UK’s transition to net zero could be severely delayed as the industry scrambles to secure contractor capacity in a seller’s market.
Utility companies have laid out plans to carry out vast programmes of work over the next decade and beyond, both in the form of huge infrastructure projects but also through their usual capital investment programmes.
However, this has coincided with a massive shortfall in worker numbers and a contraction of the supplier market, which now sees utility companies competing not just within the sector but also outside to be the client of choice.
They are doing this by offering longer-term contracts spanning multiple projects with less risk for contractors to give them certainty to expand, and through new models of procurement, such as direct procurement for customers - which has already seen interest from large European contractors.
But this still may not be enough to plug the gap between the industry’s ambition and a realistic delivery plan, as multiple billion-pound projects are expected to hit the market simultaneously and regulators are starting to consider the implications if there is not enough workforce to go round.
Huge workloads
The energy industry already has the highest workload of all infrastructure sectors, according to the Royal Institute of Chartered Surveyors, and this is only set to increase.
To meet the government’s 50GW of offshore wind target by 2030 the UK will need to build 20 new offshore wind farms in the next six years – more than double the historic rate. This will require 17 new transmission consents within the next four years, which represents a fourfold increase in annual projects. In total the three transmission operators are expecting to carry out £20 billion worth of transmission investment across 26 projects by 2030.
It is a similar picture in the water sector as it puts plans in motion to secure water supplies for the
coming decades. There are currently 18 major infrastructure projects being progressed towards construction in the next 15-20 years. These include reservoirs and water transfer schemes, which add up to a total potential investment of £14 billion.
But this once-in-a-generation programme of work is not the only area where activity levels are increasing. Water companies are planning ambitious capital investment programmes for the next asset management period (AMP). Yorkshire Water alone is planning on spending £1.3 billion on a stormwater programme to prevent sewerage overflows.
As examples in energy, UK Power Networks plans to invest £100 million during the RIIO-ED2 price control period on connections-driven reinforcement, diversions of assets and load-related reinforcement. Northern Powergrid expects network investment levels to increase by over 75% in the 2023-28 period to facilitate decarbonisation - the majority of which will be delivered by contractors.
However, contractor availability to carry out these ambitious plans is by no means guaranteed.
Ofwat is already considering the potential implications for major projects in the future of possible supply chain constraints in its board meetings ahead of the influx of water infrastructure project tenders to the market.
on transmission
And while Northern Powergrid states in its business plan that there is a “significant degree of confidence that we can build the capacity needed”, it also acknowledges that it has had to make changes to support the supply chain in scaling to meet its requirements.
“We place a large premium on the importance of being able to source, train and retain new people to our industry and to keep hold of the people we already have.”
James Haddon, director, Barhale
Labour shortages
While the government has been vocal about the job creation expected in the energy market, contractors are reporting difficulties in recruiting for roles.
The Civil Engineering Contractors Association (CECA)’s Workload Trends survey from the third quarter of 2022 found that 75% of firms were struggling with the supply of skilled operatives, while also experiencing the eighth quarter of successive growth in workloads.
CECA chief executive Alasdair Reisner said: “These statistics should act as a wake-up call, not just to industry, but to the UK and devolved national governments.
“There has been a persistent skills gap in our industry for many years but in the current economic climate the discrepancy between the skills level of the workforce and the pipeline of projects we plan to deliver has reached alarming proportions.”
On top of this the existing workforce is expected to halve in some sectors due to the retirement of the baby boomer generation, which will see 275,000 jobs needing to be filled by 2030 alone.
In the water treatment industry for example almost half the remaining workforce is set to retire within
the next 20 years. The sector also has the highest number of hard-to-fill vacancies, according to the Engineering Construction Industry Training Board.
Added to this nearly a fifth of workers left the industry during the covid pandemic.
“We know that there are medium to long-term predicted shortfalls, but there are some immediate shortfalls, and we see that as a result of a combination of factors. We said back in 2020 when we published our workforce and renewals strategy that because of the retirement of the baby boomer generation and the green agenda that the sector would need to find around 275,000 jobs this decade, and this is true. I think if anything the acceleration of the net zero agenda and associated infrastructure requirements will only exacerbate that,” says Phil Beach, chief executive at Energy and Utility Skills.
James Haddon, director of water contractor Barhale says: “While it is positive that water companies are keen to invest more heavily, we need to ensure that capacity exists in the supply chain to meet the additional demand.
“We place a large premium on the importance of being able to source, train and retain new people to our industry and to keep hold of the people we already have.”
Insolvency and competition
While contractors are struggling to recruit, their overall numbers are also dwindling. Research for a report conducted by tier one suppliers in the water industry with the Water Industry Forum revealed that there has been a 50% reduction in their number since the start of AMP5.
There are two main reasons for this, according to ‘The optimal delivery model for AMP8 – a view from the supply chain’.
One is fragility in the supply chain, as demonstrated by the demise of contractor NMCN in 2021. NMCN was turning over £283 million from the water industry the year before its demise, with a profit of £7 million. However, the company overstretched itself, with the problem contracts including a new £100 million water treatment plant for Severn Trent.
The cyclical nature of investment focused on the three middle years of each AMP period has led to a ‘boom and bust’ culture in the water sector which stretches contractors’ resources and makes it difficult for them to plan effectively.
Haddon says: “As contractors, our capacity greatly depends, first, on our ability to manage successfully the growth of our resources and, second, to prioritise carefully where those resources are deployed.”
reduction in number of contractors
While water has traditionally been an attractive sector for contractors, other markets are now offering higher returns and less risk. Beach says one of the issues facing the utility sector is that all industries that undertake excavations need broadly the same skill sets. The explosion in the demand for broadband has seen utility contractors moving to take advantage of this trend.
Major utility contractor Clancy was clear in its 2022 annual report that it is doing just this, commenting on the transferability of its skills base for areas such
as transportation. At the start of this year it won a multi-million pound broadband contract with Gigaclear to improve connectivity in Surrey – the first of many contracts it hopes to win in the telecoms market.
Ronan Clancy, executive director at Clancy said the firm's 60 years in utilities and civils meant it was “well-placed” to support the roll-out of fibre. “As demand for broadband capacity – now considered a vital utility – continues to grow, we’re exploring new opportunities to support this fast-growing market, alongside our work in water and energy.”
In other areas of the sector, such as gas, a lack of clarity over policy risks contractors moving to industries which have a more certain future, says Beach. The question mark hanging over how much of a role hydrogen will play will create issues down the road when infrastructure is needed.
“That will require a long-term plan to get the contractors in place to deliver a major national infrastructure programme around upgrading the pipework to carry hydrogen,” he says.
Client of choice
The general consensus of the supply chain is that the existing models of operation in the water and energy sectors have not supported a sustainable supply chain, and this risks the long-term viability of key suppliers.
Utility companies should focus on trying to attract suppliers to the sector, increase competition and reduce the risk of supplier failure.
“In the current climate, it’s not good enough to simply say, ‘here’s the work, come and get it’,” warns Steve Tasker, market director for energy infrastructure at Atkins.
“We’ve seen clients working harder to make a project sound more attractive to contractors, either in terms of the type of work to be delivered or through the commercial returns. You see this at the market engagement stage where there is huge effort being put into attracting contractors.”
Suppliers say there are several areas for change, including giving contractors better visibility of the project pipeline so they can plan better. Tasker adds: “We have seen clients establishing construction partners well in advance of work beginning in order to secure their supply chain.”
Contractors would also like to see longer contracts being offered to the market. Haddon says: “We see wins around improving capacity by optimising the investment cycle. The ingrained cycle of feast and famine for contractors across the five-year AMP period could be eased by spreading the work more evenly.
“Lengthening the investment periods beyond five years would also provide greater certainty for contractors allowing them to have the confidence to scale their businesses to meet increased demand.”
Water companies that are currently tendering for their AMP8 period appear to have taken this advice on board. Yorkshire Water is looking to secure contractors for its capital investment programme over a ten-year period, which would cover the next AMP period “and beyond”.
Rachael Fox, head of programme delivery at Yorkshire, said: “We want to build sustainable, long-term relationships with our partners, with a view to collaboratively delivering our £3 billion capital programme successfully and continuing into AMP9.”
There has also been a shift towards clients taking a fleet-based approach, says Tasker, which sees the supply chain able to shift from one project to another.
“This approach helps with resource issues as well as ensuring skills and knowledge are transferred from one site to another. It’s also a way to deliver cost efficiencies, as is the case in the new nuclear build programme currently underway in the UK.”
One company planning to put this fleet-based approach into action while also giving earlier visibility to the supply chain is National Grid Electricity Transmission (NGET). It is currently looking to partner with the supply chain for a potential 12-year period to deliver its “Great Grid Upgrade”, which will initially deliver nine Accelerated Strategic Transmission Investment (ASTI) projects through a £4.5 billion contract.
NGET’s director of onshore delivery Matt Staley said the company decided against tendering for individual projects in favour of a long-term collaborative partnership so that it already has its supply chain in place ready for any future work.
He admits that the quantity of work in the sector was a factor in deciding to go for an enterprise approach, as it will give early visibility to the supply chain and should allow suppliers to make early commitments and have time to expand to meet NGET’s needs.
“We expect additional work will come through the ASTI process. We expect further schemes will need to be delivered and we are hoping we are setting up a longer-term relationship that not only delivers the known work today but also provides an efficient and suitable vehicle to be able to deliver further work and further schemes as well,” says Staley.
Staley expects the approach to have broad appeal, allowing it to invest locally in SMEs because of the longer-term certainty, while also garnering interest from foreign markets.
“I think we will get a wider interest than we would have done just through a project-by-project approach, we are really going into that portfolio programmatic collaborative approach, and I think that does open up interest on a broader market.”
But he adds that there is global demand for the skills it is seeking and is interested to see how contractors balance bidding for foreign work while also serving their own markets.
“We will see how wide that interest goes and how that that interest flows through the procurement process.”
“In the current climate, it’s not good enough to simply say, ‘here’s the work, come and get it’,”
Steve Tasker, market director for energy infrastructure, Atkins
"We are hoping we are setting up a longer-term relationship that not only delivers the known work today but also provides an efficient and suitable vehicle to be able to deliver further work."
Matt Staley, director of onshore delivery, NGET
Attracting new players
Another area of the market which is trying to appeal to foreign contractor markets is in the water sector through the new Direct Procurement for Customer (DPC) model. This has been introduced for all infrastructure projects with a whole-life expenditure of over £200 million and will see water companies tendering the design, construction, financing, operation and maintenance of projects.
The first DPC project to hit the market – United Utilities’ Haweswater Aqueduct Resilience Programme (HARP) - has three consortiums largely made up of continental European companies.
However, Philip Dupres, head of Utilities at Addleshaw Goddard - the law firm advising on the HARP project – agrees with Stanley that tapping into foreign markets is unlikely to be a panacea to the UK contractor crisis.
The US has seen a huge increase in the number of infrastructure projects taking place as a result of 2022’s Inflation Act of 2022, while there is still “massive” spending in Asia, he says.
“In a way you think “oh it’s great,” there are European contractors with lots of capacity but then you are competing on a global scale with projects all over the world and that brings in different pressures.”
In order to compete, UK utilities may have to adopt some practices which are uncommon here, such as paying the costs of bidding.
Although part of the point of introducing DPCs to the water sector was to widen the supply market and bring in more innovation, it has had the unintended consequence of alienating the UK supply chain.UK contractors perceive the risk model on offer to be too similar to the old social infrastructure model Private Finance Initiative (PFI), which was a large contributing factor to the demise of the contractor Carillion in 2018.
Dupres says they have decided not to get involved with DPC as they have more than enough work in the market to bid for but adds that their assumptions about risk are not necessarily correct.
“UK contractors might have this view that DPC asks contractors to take on risk and actually, why would they do that? They have a full order book of more understood work, and in water if you look at the AMP frameworks that are coming out for AMP 8 they are huge. For some water companies they are multiples of what’s gone before, and contractors could think they are much more known quantities in terms of risk allocation,” he says.
Dupres points out that every DPC project is unique and will not necessarily adopt the same risk position as the HARP project, but there are a lot of things about DPC which are more contractor friendly than PFI contracts were as Ofwat wanted to encourage competition.
“In order to get to the point where the contracts are at the right risk-level they have to participate in it.”
He adds that Ofwat and water companies will need to further engage with contractors to understand the issues as the sheer number of DPC projects in the pipeline means demand is more than likely to outstrip supply.
With parallel models expected to be introduced for onshore transmission infrastructure, both Ofgem and the government will be keenly watching to see how the potential issues in the water sector are ironed out.
