Steep inflation always causes a major challenge for businesses in all kinds of sectors. In the construction industry, it leads to increases in prices for things like building materials and machinery hire, and it can result in projects being delayed and profit margins being reduced.
In recent times, inflation has soared and significantly impacted the UK’s construction industry.
Seeing as inflation is continuing to rise, construction companies and those involved in the supply chain could be facing problems for some time yet.
Material Costs Have Risen Significantly
Covid-19 lockdowns, Brexit, the war in Ukraine, and other factors, are all affecting the steep rise in inflation that the construction industry and other industries have recently experienced.
In 2022, according to the latest statistics from the UK’s Office for National Statistics, the construction material price index rose by an incredible 25.2% year-on-year in April 2022. That is the eleventh consecutive year-on-year increase since June 2021.
In the first four months of 2022 alone, ready-mix concrete rose by 12.5%, bricks, flagstones, blocks, and tiles rose by 18.4%, and steel bars for concrete reinforcement rose by a staggering 51.2%.
Therefore, it should already be clear just how much inflation is affecting companies in the construction industry.
Indeed, according to a 2022 survey conducted by the UK’s Federation of Master Builders, 98% of builders in the country saw material costs increase in the first quarter of 2022, and 83% of those builders had no option but to pass on those additional costs to their clients.
The survey also showed that 73% of UK builders ended up delaying projects due to a lack of materials.
Subcontractors Are Feeling the Pinch
While most companies that work directly and indirectly within the construction industry are feeling the impact of inflation, some firms are thriving due to the increase in inflation.
For example, there has been a great effort to keep the supply chain moving, which means the top-rated movers for long distances have seen their business increase.
But others, like subcontractors, are really feeling the pinch.
In particular, many subcontractors who entered fixed-price lump sum contracts before 2022 or in early 2022 are discovering that their existing construction contracts are not economically viable anymore.
With a lump sum contract, a single price for all construction work is agreed upon before the works begin, which means many construction companies simply cannot deliver the projects they were contracted to carry out.
Obviously, the ramifications of that are huge, both for the construction firms and for their customers.
Many subcontractors who are still in operation are now increasing their loans in order to fulfil client projects, while other subcontractors are falling by the wayside.
Unless operators further up the supply chain can be more flexible in their prices, subcontractors and others will continue to be massively affected.
Some of the UK’s Biggest Construction Projects Have Felt the Impact of Rising Inflation
It is not only subcontractors and small companies that are being affected. Some of the UK’s biggest construction projects have also felt the impact of inflation.
The rise in the cost of key building materials in addition to things like geopolitical risks has seen all of the UK’s major construction projects go over budget and past their due dates for completion, including the HS2 railway, Crossrail, Hinkley Point C, and the Battersea Power Station redevelopment.
While those major projects are now starting to get back on track, unless inflation begins to come under more control and supply chains and labour shortages are sorted out soon, the construction industry as a whole in the UK, and throughout the world, is likely to be in turmoil for some time yet.