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Can the UK construction industry weather the brewing economic storm?

Ryan Giluley

In normal circumstances the construction industry is a bellwether sector for the wider economy and it’s not difficult to work out why.

When homes, offices, factories, and roads are being built, it’s the most visible sign of confidence in the economy because people are funding their construction for others who are willing to pay to live in them, use them or employ people to work in them.

But circumstances are nowhere near normal, and they haven’t been for some time. Just as the effects of Brexit are starting to kick in, the stop-start impact of the Covid pandemic has made predictions about the health and even the direction of the construction industry – and the wider economy – extremely difficult to make.

Just as new figures appeared to show signs of supply shortages easing, Omicron emerged, threatening to scupper any progress made in unblocking bottlenecks.

Added to that are soaring energy costs – with warnings that fuel bills could rise by 50% by the Spring ­– which have contributed to inflation rising to levels not seen since the start of the 1990s.

With those external pressures bearing down on the sector, it’s understandable that forecasters are expecting material shortages to drive up tender prices this year and next.

According to global construction consultancy Mace, UK tender prices are expected to be 4.5% higher this year, compared with last, and 2.5% higher than it predicted last September.

While Mace expects inflation to slow next year, tender prices will be 3.5% higher than in 2022 and even the elimination of Omicron and the smoothing of Brexit related road bumps are unlikely to alter that.

The main short-term issue for the construction industry continues to be widespread material and labour shortages, which is driving price growth. Last month Arcadis warned that rising energy costs could push construction tender prices up by between 4% and 5%.

News from the Timber Trade Federation (TTF) at the start of the month that timber supplies and costs are expected to stabilise – due to more regular demand for housing and imports increasing to pre-pandemic levels – will be of little comfort.

Price volatility always leads to delay and inaction, as project sponsors and developers hold off on inviting tenders, more in hope than expectation that the picture in six months or a year will be clearer.

Contractors across the UK have already had to contend with rising tender prices caused by higher material costs, with some projects being halted and retendered.

According to the Chartered Institute of Procurement and Supply’s latest snapshot of 150 construction companies across the UK, many are reporting delays to decision making by clients, contributing to the slowest sector growth for three months.

There was some good news with the number of firms reporting supplier hold-ups falling from 47% in November to 34% in December, as fewer shortages of building supplies improved delivery times, but there’s no guarantee that trend will continue.

However, those forecasts don’t take account of measures that can be taken by the industry or government to assist.

As the recent vaccine rollout demonstrated, we are at a stage far in advance of where we were at the start of the pandemic in dealing with and working through the pandemic.

Business resilience and continuity plans are more developed, allowing companies across the supply chain to work through the imposition of restrictive measures with less disruption.

Last year companies were hampered by the triple whammy of fuel supply, lorry driver shortages and supply chain delays while also dealing with the impacts of Covid, Brexit and labour shortages.

Many have learned from the experience and put in place contingencies to ensure those factors can be dealt with more efficiently and expeditiously.

As costs for fuel, energy, labour, and materials rise, bidders are altering their commercial assumptions, insisting on more flexible change control provisions in contracts, with clearer and more detailed clauses that reflect the potential for external factors to cause disruption and delay.

Amid this uncertainty cost consultants are proving their worth by providing valuable insights into likely market rates and supply trends as well as offering advice on cost saving and adding value to projects.

Governments are playing their part with the commissioning of public sector infrastructure projects and long-term housebuilding targets.

Governments at Westminster and Holyrood have long championed small-to-medium sized enterprises (SMEs) enjoying a greater share of public procurement business but this needs more urgent attention.

It’s clear from research and anecdotal evidence that SMEs find the public procurement process challenging and many need additional support with bid submissions.

Brexit and the Covid pandemic have introduced changes to the way everyone does business and the construction industry is no different. Given its importance to the economy, it is monitored and used as a gauge of how the wider economy is performing and the message, we should be sending out is that the future can be a lot brighter than current statistics suggest.

Ryan Gilluley is managing director of GCM Ltd, a Lanarkshire-based firm of cost consultants, claims and disputes experts for the construction and engineering sectors.

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BDC 317 : Jun 2024