Intro
Recent growth in the UK construction sector is impressive but supply chains face a tough year ahead as industry experts forecast spiralling build costs, materials and labour shortages and falling workloads.
Construction was hit hard by the combined impacts of the pandemic and Brexit, but a period of resurgence in 2021, with output up 12.7% year-on-year at the end of December, followed by a 2.4% rise in the 3 months to February 2022 (figures from the Office of National Statistics) provided a much needed boost to supply chain balance sheets. However, rising inflation, exorbitant energy costs exacerbated by the war on Ukraine and the lingering presence of coronavirus threaten to scupper those gains as the latest industry analysis points to rising build costs and a lack of materials and staff leading to projections of stagnating output in the months ahead.
The Government’s latest Monthly Statistics of Building Materials and Components, published by the Department for Business, Energy and Industrial Strategy (BEIS) in May, found a 24.5% increase in the cost of materials for 'all work' in March 2022 compared with the same month the previous year. Month-on-month materials prices rose by 5% from February to March. According to BEIS, the greatest year-on-year price increases were for concrete reinforcing bars, up 63.6%, fabricated structural steel, up 54.7% and particle board, up 40.7%, with the particle board changes being a focus for the KOPE team currently.
British Steel’s announcement in March that it had increased prices of structural sections for all new orders by £250 per tonne and could not offer price guarantees beyond April reflects the high degree of uncertainty and volatility in the market.
The Government’s findings were broadly mirrored in new figures from construction consultancy Linesight, which said fluctuating lumber and concrete prices will directly impact on the residential and commercial sectors in 2022. Furthermore, escalating steel and copper prices will hit the delivery of data centres and life sciences construction projects in particular, it said.
Tender Inflation
The UK has relatively little direct reliance on oil and gas imports from Russia, but the nature of the global marketplace and elevated energy prices are at the heart of materials and logistics cost spikes. Coupled with skills shortages and increasing demand for work this has created a high pressure environment that’s driving tender price inflation.
Rewind to the start of the year and cost consultant Turner & Townsend was forecasting a 4.5% rise in building tender prices in 2022. But its revised estimate at the end of April almost doubled the figure to 8.5%.The forecast for infrastructure tender prices also rose from 4.0% and 6.0%.
T&T warned that projects could be cancelled due to cost escalation and recommended that businesses “keep cool heads” and aim for “pragmatic, flexible procurement and greater collaboration with the supply chain”. And in a call back to panic buying at petrol pumps last year, it said firms seeking to stockpile materials to offset sharp price rises could inadvertently trigger price bubbles and needless shortages.
Construction is no stranger to labour shortages, which dampened the sector’s recovery in 2021 and according to industry analysis look set to worsen in the near term. Around three quarters (74%) of respondents to the Royal Institution of Chartered Surveyors’ (RICS) latest Global Construction Monitor survey said they were struggling to find workers.
Shortages were highlighted across both skilled trades and white collar roles, with 66% reporting difficulties recruiting skilled bricklayers and 63% struggling to find carpenters. Over half (56%) of respondents had problems sourcing quantity surveyors.
Wage increases
Analysis of pay trends by the industry’s biggest employment contract services firm, Hudson Contract, found that the cost of skilled labour was up in most areas of the UK in March and year-on-year.
Average weekly earnings for self-employed tradespeople in London hit £1,027, a jump of 2.7% on February, and up 13.1% on the same time last year. Average earnings in the East Midlands were at £1,070, up 2.7% on the previous month and up 10.5% year-on-year. The regions of Yorkshire and Humber and Wales also reported significant increases. The highest paid professions were plumbers, followed by demolition and wrecking subcontractors, shop fitters and steel/timber frame contractors.
Commenting on the record increases, Ian Anfield, Managing Director of Hudson Contract said: “There is still huge pent-up demand for housing in the UK and there is still a shortage of skilled workers. Our clients are flat-out with full order books, though as we saw in February, there are not quite as many tenders coming through the door.”
Despite the market constraints, construction is indeed riding a wave of strong demand. Roughly a third (34%) of respondents to the RICS’ survey reported a rise in workloads in the first quarter, slightly up from 33% in the final quarter of last year.
The infrastructure sector was credited mostly for the rise and over half of respondents (53%) reported a rise in workloads for energy infrastructure. However, higher costs and worries about the economic outlook appear to have begun to put a brake on demand for construction.
Strategic outlook
The latest monthly survey of construction industry purchasing managers, by S&P Global / the Chartered Institute of Procurement & Supply, recorded the weakest rate of output growth in April since the start of the year. Residential work remained the worst-performing sub-sector and saw the greatest loss of momentum, while the fastest-growing sector remained commercial work, followed by civil engineering.
Surveys by Deloitte and BDO in April also pointed to the prospect of slowing growth and businesses taking on more debt in order to survive. In addition, the Construction Products Association said its new forecast for 2.8% growth in construction output in Q1 would normally be considered cause for celebration, but not when 4.3% growth was forecast just three months ago in January.
According to the trade group, the downward revision stems from concerns around price pressures arising from local and global issues, including the conflict in Ukraine, ongoing labour and product availability issues and the impact of reverse charge VAT and IR35. Amid chilling warnings from the Bank of England that inflation could reach an eye watering 10% by the end of the year and warnings from the IMF that Russia’s invasion will likely hit the UK harder than most and construction may have to wait a while for any sustained and robust recovery.
At KOPE, we are focusing on addressing aspects of the skills shortage by connecting construction projects to the Offsite supply chain more effectively. Coupled with this market visibility, a key component of our approach is broad automation of common tasks from design to manufacture, to help avoid costly mistakes during tender and procurement.
As volatility increases, our aim is to give our partners access to predictability, streamlined processes and a broader market.
