How are councils’ funding troubles impacting construction?

Council-funded projects face an uncertain future as a once-steady source of work for contractors comes under financial strain. Keith Cooper reports

Local authority-led projects to develop, remodel and maintain estates of town halls, leisure centres – and everything in between – feed a steady stream of work for contractors. Councils plough billions of pounds from their budgets and borrowings into such projects and have access to some large government cash, such as the £8.4bn levelling-up fund (LUF). But running alongside this apparent embarrassment of riches are headlines of councils under unprecedented financial pressure. 

National media has been reporting that rising numbers of councils are near bankruptcy, putting projects at risk of being cut, scaled back or shelved. For example, Nottingham City Council issued a Section 114 notice last November, meaning that only spending on essential services is allowed.

“More of the work we do now is addressing the decarbonisation of the existing building fabric”

John Shannon, Seddon

So just how long will this once-reliable source of work last? What’s holding councils back? And how can the industry keep their capital projects on track? To find out, Construction News has looked behind the alarming headlines, spoken to contractors, and examined the numbers nationally and in town halls.

CN found that, while many councils are suffering financially, they are still proceeding with projects, though often with scaled-down ambitions. However, after years of austerity and the unprecedented present pressure on revenues, many are now struggling to respond to sudden shocks such as hikes in construction and borrowing costs.

Joanne Pitt, a senior policy manager at the Chartered Institute of Public Finance and Accountancy, says: “Rising inflation has meant councils having to revisit some of their projects a couple of times a year; a teeny-weeny rise can have a significant impact which reverberates around the council. It’s been a big challenge for councils’ capital projects.”

Budget backtracking

The County Councils Network (CCN), an umbrella body for 41 county and unitary authorities covering 75 per cent of the landmass in England, says its members have been hit by a “perfect storm”. Michael Hudson, president of the Society of County Treasurers, which advises the CCN on finance, says: “Our revenue grant has been reducing and many of our members are struggling with asset maintenance. The high cost of borrowing is eating into our revenue and the market has gone sluggish, meaning less income from receipts.”

Councils expecting to sell land for HS2’s axed northern leg have been hit particularly hard, he adds. “They will now be revising their budgets because of the lack of receipts,” he says.

“Councils have to deliver a broad range of services against unprecedentedly constrained budgets and the need to decarbonise at pace”

Andy Clarke, Costain

This financial precarity and ballooning of project costs risks councils’ access to billions in central-government funding. If substantially changed,  projects that have already been allotted funding must be reapproved for spiralling costs or budget constraints. Bradford Council, for example, has returned to the government with its revised plan for a leisure, community and health centre that was originally allotted £20m from the LUF (see box, below).

Hudson is pessimistic about the position of councils improving. “I don’t see borrowing rates changing,” he says. “We don’t know what our fund ing will be for the next four to five years or what the council-tax position will be.”

This bleak outlook comes after years of increased council expenditure on new construction, conversion, or renovation was reversed in 2022/23, according to official figures, with only a small recovery predicted for 2023/24 in England.

The national picture reflects deep difficulties for individual authorities. Shropshire Council cut £120m from its £405m capital budget in 2022 as it froze £134m of projects, and Stoke-on-Trent City Council cut its capital programme by £14.5m in 2022. These are not isolated examples. Six out of 10 councils in urban areas are taking cost-cutting measures to shrink their capital budgets, according to a recent survey by the Special Interest Group of Municipal Authorities (SIGOMA), which represents 47 councils. One member, Coventry, is re-evaluating its planned projects and may shrink the scale of those whose budgets are already set, according to council papers from last October.

“There are a lot of public-realm schemes to get people back into towns”

Alison Chippington, Galliford Try

Seddon Property Services managing director John Shannon says he has seen evidence of council-run projects being deferred, suspended or revamped to keep them within budget. “We are working on one scheme in the Midlands that is on its third design,” he adds.

These kinds of alterations are “food and drink” for a firm like Seddon, which does 85 per cent of its business with the public sector, Shannon says. Seddon has, however, noticed a shift towards extensions and refurbishments as councils seek to hit zero-carbon targets and reconfigure their estates for post-pandemic work. “More of the work we do now is addressing the decarbonisation of the existing building fabric, the walls, windows, and roofs,” Shannon says. “We are also refitting offices across the country because a lot more people are working from home.”

Unique challenges

This push for decarbonisation at a time of unprecedented financial and economic pressures adds to the “unique set of challenges” facing councils, says Costain director of integrated transport Andy Clarke. “They have to deliver a broad range of services for the communities they serve, against a backdrop of unprecedentedly constrained budgets and the need to decarbonise at pace.”

Government figures show that councils spend most of their capital budgets in three key areas: education, housing and highways. Most education funding comes from the Department for Education, whose budget only began to rise this year after seeing a 46 per cent real-terms decline since 2009/10.

But education is still an attractive market for some contractors. Stevenage-based Conamar recently began working on schools as part of its plans to spread its risk profile. Its preconstruction director Nathanial Crichton says local government work is a growing part of its business.

“Our experience of working in retail and office-based projects in tenanted buildings with live environment has helped us gain a lot of traction in this market,” he says.

In most years since 2018/19, councils’ biggest capital spend has been on highways and transport. But spending in this category was outstripped last year by the £8.5bn invested in housing. Derby City Council, for example, sets aside enough capital to build or acquire 100 homes a year. This housing investment has, however, been hampered by new planning rules for compulsory second staircases in new residential buildings above 30 metres. Havering Council and Wates Residential were forced to pause their 550-affordable-home regeneration project in May because of the “regulatory uncertainty” around the new rule.

Local transport is still, however, a likely growth area for council capital spending, especially in and around town centres, many of which are in urgent need of post-pandemic reconfiguration. “There are a lot of public-realm schemes to get people back into towns, walking around them and spending time there,” says Galliford Try’s pre-construction director for infrastructure Alison Chippington.

A major sources of government funding for this type of work are the £5.7bn City Region Sustainable Transport Settlements, which Chippington says are very focused on the kind of low-carbon active transport projects that favour cycle, scooter and foot paths. “Local authorities are already accessing that funding and we are seeing the tenders come through,” she adds.

Transport projects such as multimodal hubs to connect roads, bikes and rail routes are also winning LUF funding, Chippington says. “That spending is going very well, especially in local authorities which are well-organised,” she adds.

However much funding is on offer, councils’ capacity to get projects off the ground is being increasingly limited by their ever-depleting internal resources. The sort of “shovel-ready” projects favoured by government grants are now “few and far between”, according to CIPFA’s Pitt. “When a council starts on a capital project it can take a year or so to get to the development stage,” she adds.

All this uncertainty and potential for delay has made some contractors very selective about which councils they work for. Chippington says Galliford Try prefers to secure work through major frameworks run by the likes of the Midland Highways Alliance or the so-called combined authorities which allow multiple councils to collaborate. “They get schemes off the ground quite quickly,” she says.

Less popular are the “less professionally run” frameworks put together by individual councils themselves, one contractor tells CN, as smaller local authorities often struggle to issue their procurement or engineering documents.

However, by engaging early with councils, contractors can help with the capacity problem and unlock the potential pipeline of work from smaller authorities. Galliford Try, for instance, recently helped an undisclosed Yorkshire authority from the outset to put together an outline and full business case. “This means they can apply for the right amount of money at the right time and put the final price together before going to the Department for Transport,” Chippington says.

Derby City Council says it would also welcome closer and earlier collaboration with its construction partners, especially in the design phase where costs could be “excessive”. It is seeking more fixed-priced contracts and also building “flexibility” into projects in case of changes.

Whatever measures councils and construction firms take to keep capital projects on track, one thing is for sure: they will both need to work even more closely as financial pressures and uncertainty over costs continue.