The way ahead for Portuguese construction

Even before the onset of COVID-19, political and economic turmoil have had a drastic impact on Portuguese construction. Between 2002 and 2016, the industry suffered a cumulative loss of more than 50% in productivity as a result of dwindling public investment and the 2008 economic crash.

The sector began to recover in 2017, however, and steady growth is expected in coming years despite the impact of the pandemic, mainly due to private investment in residential building and public investment in infrastructure.

Furthermore, there are few barriers to entering what is an already highly competitive market based on lowest-cost bids. This results in businesses having low profit margins, and there is no size advantage when dealing with suppliers or buyers. Other issues include the industry’s traditionally high rate of short-term and low-skilled labour, with companies failing to invest sufficiently in the workforce. Recently, the shortage of specialised skilled labour and steady growth in the cost of construction materials have further damaged the sector’s profitability.

Ensuring efficient use of materials and energy to minimise the industry’s environmental impact is another consideration, as failure to comply with standards and legislation is not uncommon. Rules are usually highly restrictive, thus making compliance difficult, and this is compounded by a lack of inspection and audit. Meanwhile, the costs for re-use and recycling of construction and demolition waste are high, and there is no comprehensive policy to support or encourage these practices.

Nevertheless, Portugal has been evolving towards greater energy efficiency, as seen in large-scale projects, including new-builds, and the marketing of products for retrofit, such as thermic insulation in existing buildings. Energy certification of buildings for sale or rental was made compulsory in 2013, and Portugal also has voluntary systems to support sustainability including the construction leadership initiative LiderA.

But in terms of innovation, Portuguese construction performs poorly compared with other EU countries. No Portuguese construction-related firm ranks among the top 1,000 companies in the union for expenditure on research and development, according to the 2019 industrial R&D investment scoreboard. In fact, businesses’ research and development expenditure has been declining in Portugal since 2010.

Company registration schemes impose complex financial, economic, technical, professional and insurance conditions for potential entrants, while the fees that construction service providers are charged for this process are usually higher than in other EU countries. Similarly, professions such as civil engineering and architecture are highly regulated in Portugal, more so than elsewhere in the EU.

Moreover, municipalities exercise considerable power over land use, but the time needed to obtain licences from them varies according to their respective administrative capacities. Portuguese authorities are therefore trying to streamline procedures for obtaining construction permits and encouraging the use of online portals.

But that increasing demand requires the government to promote professional courses and encourage construction firms to play their part, to ensure that the necessary labour is available to avoid skills shortage. There is already a particular need to strengthen the construction workforce so more technical and vocational education should be offered at upper-secondary level, as well as on-the-job training for those that need it.

It will also be vital to standardise working practices across the sector. Global standards such as ICMS, IPMS or NRM are not usually adopted unless there is client demand in particular cases. As my previous article detailed, it is not therefore uncommon for standards to differ significantly from one project to the next, and even within the same project. Together, the lack of skills and standardisation constitute major barriers to the industry’s efficiency and competitiveness. Regulation could then play an important role in enforcing and promoting professional standards, as well as establishing a framework for inspection and disciplinary action to inspire trust and confidence in the industry.

Early contractor involvement (ECI), including a guaranteed maximum price (GMP) and time agreement, has recently been on the rise for construction works, especially where owners prefer to work with a specific contractor from the outset and benefit from their active participation in the project development and design.

Regardless of the model used, contracts are still often poorly prepared, leading to ambiguities and misunderstandings between parties. For instance, it is frequently the case that the scope of work is not fully specified, while insufficient time is allowed for contractors to evaluate the project and submit well-prepared bids. The lowest bidder cannot always provide assurance that it has the competencies and capacity to perform the work successfully either.

Furthermore, design professionals do not share the risk borne by a fixed-price builder, so have no incentive to mitigate design and measurement errors. Owners should therefore ensure that designers are held contractually responsible for incompatibilities, errors and omissions. The adoption of standards and contract models could support this by ensuring all relevant stakeholders understand the process properly.

In terms of innovation, more can be done to capitalise on digital transformation and the circular economy, as both will soon be essential to remaining competitive. For instance, Portugal is not yet as advanced as other countries in implementing BIM; however, construction is increasingly turning towards a more digital and collaborative approach that will make better use of information technology.

Clients already seem to be interested in moving away from transactional contract models towards collaborative ones, where BIM could also be of benefit. Although there is no prescribed approach, ECI with a GMP and time agreement has been increasingly adopted on large-scale or complex projects with the aim of mitigating investment risk through better planning and cost control. As with all procurement models, the success of this approach is highly dependent on the project specifics and managerial effectiveness.

Companies that provide regulated, professional project and construction management services are therefore going to be crucial to help developers decide the best construction procurement model and administer competitive bids properly, as well as promoting the highest qualifications, standards and values, throughout the project life cycle.