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 housing. However, these are particularly challenging times, with firms facing the aftermath of Covid, rising costs and increased interest rates. Insolvency rates are on the rise and macroeconomic pressures bearing down on many smaller firms.

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 myriad challenges, from financial constraints to regulatory hurdles. But with the right policies in place, they can prosper”

So what are the essential policies SMEs require, not only to survive but to prosper in the construction industry? How would these policies ensure SMEs can make meaningful contributions to the government’s target of 300,000 new homes per year, which according to the Department for Levelling Up, Housing and Communities has not been met? Here are some ideas:

SME construction business strategy

To address some of the pressures on SME businesses, a small construction business strategy would bring those businesses into the fold of government decision-making.

Meaningful engagement could focus policy proposals on a sector experiencing significant pressures, and adjust policy proposals that are marginalising the sector. This is pivotal to achieving housebuilding targets and economic goals.

Facilitating access to finance

A primary hurdle for construction SMEs is limited access to adequate financing. To thrive, SMEs need funds for project execution and working capital, and investment in technology and skills. Policymakers must consider the following steps to make access to finance more accessible for SMEs:

Streamlined loan approvals: Simplifying the business-loan application processes and offering lower interest rates on construction projects would be instrumental in easing SMEs’ financial burdens.

Government loan guarantees: Providing guarantees on loans for construction projects would encourage banks to lend to SMEs with reduced risk.

Fostering skill development

Skilled workers are essential for project efficiency and quality. The government could provide training subsidies, covering both graduate and apprenticeship programmes. Encouraging and incentivising SMEs to take on apprentices and graduates would help address the industry’s skill shortage and nurture future talent.

Reducing the regulatory burden

Excessive regulations can hinder the growth of SMEs in construction. To foster growth, policymakers should aim to simplify and streamline the regulatory environment with:

Planning reforms: Simplifying the planning process for construction projects can reduce delays and minimise costs for SMEs.

Regulatory compliance assistance: Offering guidance and support to SMEs on navigating regulations would significantly reduce the regulatory burden.

Standardisation: Developing standardised industry regulations would simplify compliance.

Enhancing access to information

Access to market information, procurement opportunities and technological advancements is critical for construction SMEs to succeed.

To level the playing field and promote growth, policymakers should aim to establish centralised information hubs, creating platforms where SMEs can access market insights, tender opportunities, and emerging technologies.

Promoting sustainability initiatives

Sustainability has gained prominence in the construction industry, offering SMEs a competitive edge while contributing to environmental wellbeing. Sustainability can be encouraged through:

Green subsidies: Offering financial incentives for adopting eco-friendly construction practices.

Certification support: Facilitating the certification process for green building practices would open doors to new projects and markets.

Brownfield development relief: The government is right in identifying the high potential of brownfield areas as sites for new homes, but small construction firms 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. Policymakers should support SMEs in managing these risks through:

Insurance support: Facilitating access to affordable construction insurance would help SMEs protect themselves from unforeseen losses.

Efficient dispute resolution mechanisms: Streamlined dispute resolution processes would reduce legal costs and prevent project delays.

Project bank accounts (PBAs): 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, funds are ringfenced and held in a separate

account, reducing the risk of non-payment, insolvencies, or financial mismanagement. This security is particularly important for smaller businesses that may lack the financial reserves to weather payment delays.

Embracing digital transformation

The adoption of technology is essential for SMEs in construction to prosper. Policymakers could subsidise technology adoption by providing financial incentives or tax breaks for SMEs to invest in construction technology and drive innovation.

Access to government contracts

Government contracts can be a significant source of revenue for SMEs in construction. Policymakers can improve SMEs’ access to these contracts through:

Contract set-asides: Reserving a portion of government contracts for SMEs can create opportunities for them. It would be of significant benefit if the government reaffirmed its target of 33 per cent of public procurement money reaching small businesses, and require councils to measure this in their development projects and extend this intent to joint-venture use of land.

Simplified bidding processes: Streamlining the bidding process would encourage more SME participation in  government projects.

More than survival

SMEs in the construction industry face myriad challenges, from financial constraints to regulatory hurdles. However, with the right policies in place, they can not only survive, but prosper. As policymakers work to implement these policies, SMEs can continue to drive innovation, provide jobs and contribute to the growth of the industry, bolstering the broader economy in the process. They can become active contributors to a sustainable construction sector that thrives in the face of challenges.