The £5bn Cost of Missing Skills in UK Manufacturing and Engineering SMEs
Study purpose and focus
Manufacturing and engineering play a critical role in the UK economy, driving innovation, exports, productivity and generating high-value employment. However, businesses across the sector face persistent skills shortages and skills gaps that threaten growth, competitiveness and long-term resilience. To encourage, expedite and inform the policy response, in 2025 Enginuity commissioned SQW, in collaboration with Oxford Innovation Advice and Qa Research, to quantify the economic cost of skills-related challenges facing manufacturing and engineering SMEs across the UK.
The resulting study, Mind the Gap: The £5bn Cost of Missing Skills, filled a critical gap in the evidence base. It examined how widespread skills challenges are, quantified their impact on SME performance and the wider economy, explored their underlying causes, and identified practical actions that could help address them.
Methodology
SQW adopted a mixed-method approach that combined primary research with advanced economic modelling and qualitative work, providing a robust evidence base for understanding the scale, causes and consequences of skills challenges in the sector. The study drew on a survey of 227 manufacturing and engineering SMEs across the UK, 19 in-depth interviews with business leaders and sector experts, and roundtable discussions involving employers, policymakers and other industry stakeholders.
To estimate the economic cost of skills-related challenges, SQW developed a bespoke simulation model that scaled survey findings to the wider SME population. To strengthen confidence in the findings, SQW also developed an independent macroeconomic model based on Annual Population Survey (APS) data which provided an alternative view, underpinned by a different type of data and assumptions. Both approaches produced closely aligned estimates of the scale of the challenge.
The qualitative research incorporated a Q-sort methodology, a structured approach that enables systematic comparison of stakeholder views and identification of areas of consensus and disagreement regarding potential solutions.
Key findings
Skills challenges are widespread across manufacturing and engineering SMEs. Around half of surveyed businesses reported skills gaps (i.e. employees not being fully proficient in their roles), skills shortages when recruiting (i.e. being unable to find people with the required skills), or both. While technical and manual skills remain critical, employers also highlighted growing demand for digital, leadership, data and analytical skills. The challenges extend well beyond entry-level recruitment. Businesses reported gaps and shortages across a broad range of salary bands, including experienced technical, supervisory and managerial roles.
Based on the survey of SMEs, we estimated that skills-related challenges cost the sector approximately £5.2 billion per year, equivalent to around 2% of annual sector output. Around three quarters of this cost arises from skills shortages, with the remainder attributable to skills gaps. For affected businesses, the average annual impact is estimated at around £110,000 in lost Gross Value Added (GVA). Importantly, the APS-based macroeconomic modelling produced very similar results, strengthening confidence in the findings.
The evidence suggests that the skills challenges stem from a combination of interrelated factors: an ageing workforce is creating significant replacement demand at the same time as too few young people and career changers are entering the sector. SMEs also pointed to persistent misconceptions about manufacturing and engineering careers, mismatches between training provision and business needs, and practical constraints that limit investment in workforce development. Many SMEs are caught in a vicious circle: skills gaps and shortages suppress productivity and constrain growth, reducing the resources available for training and workforce development, which in turn makes it harder to address the underlying problem.
Ways forward
Drawing on evidence from the survey, interviews, roundtables and Q-sort analysis, the study identified a number of practical actions that could help address the challenges facing the sector. These include exploring the case for a skills tax credit to encourage employer investment in training, rebalancing skills policy towards upskilling and reskilling existing workers, improving information about careers in manufacturing and engineering, strengthening vocational qualifications, and supporting collaborative approaches (e.g. regional networks) that help SMEs share the costs and risks associated with workforce development.
More broadly, the research highlights the need for stronger alignment between skills policy and wider industrial priorities. Employers emphasised the importance of stable, long-term policy, better coordination between industry and Government, and a clearer focus on ensuring that training provision reflects the practical needs of businesses.
The £5 billion annual cost represents not only a significant challenge for manufacturing and engineering but also a substantial opportunity. Addressing skills gaps and shortages could unlock productivity growth, strengthen manufacturing and engineering supply chains, support delivery of national priorities, and improve the long-term competitiveness of the UK economy.
Report and contacts
The report has now been published by Enginuity and can be accessed through Enginuity's website here.
If you would like to find out more about SQW's work on the study, please contact Sergei Plekhanov at SPlekhanov@sqw.co.uk.
