Despite enormous challenges faced elsewhere in the economy, the UK’s Building and Construction sector continues to grow, with activity levels at a seven-year high.
Construction output is forecast to rise by 12.9% in 2021 and 5.2% in 2022, with output in March 2021 alone seeing a 5.8% month-on-month increase, the largest increase since September 2020.
Indeed, output in March 2021 was 2.4% (£334 million) above the February 2020 pre-pandemic level, and although new work was up just 0.5%, repairs and maintenance were 7.7% above the same period last year.
This correlates with the demand for house upgrades and general maintenance with people spending more time at home, moving house and having more ‘available cash’ which would previously have been spent on holidays and other big ticket items.
This also highlights that cancelled or delayed new projects, some of which will impact activity in three to four years’ time, are being more than offset by demand elsewhere within the sector.
However, tensions are starting to materialise as shortages of raw materials and sky-rocketing price increases are starting to weigh heavily up and down the supply chain.
UK Inflation has spiked over recent months to a June CPI of 2.4%.
Price inflation across most building products is even more stark as a result of increased demand, material shortages that have stemmed from factory closures and a reduction in the mining and extraction of base materials. The prices of steel, timber and plastic products are all nearly 50% higher than they were pre-April 2020.
UK Steel Price
Steel prices per tonne have increased from c.£490 in May 2020 to c.£800 in May 2021. The British Electrotechnical and Allied Manufacturers Association (BEAMA) point to the extreme reduction in steel production during the early parts of the COVID-19 pandemic as the root cause.
There has also been increased demand for certain types of steel beams, specifically those used in house renovations, which has compounded supply issues.
Timber Price
Timber has also seen a dramatic increase in price from less than $500 per thousand board foot in Spring 2020, to an all-time high of $1,515 in May 2021. The price has recently retracted by 51% to $770 in July 2021, but this is still 60% higher than where it was in Spring 2020.
The UK, which is particularly reliant on imported timber, is currently experiencing Brexit-related constraints with c.80% of softwood used in buildings coming from Europe, where the timber mills are presently closed for annual summer maintenance. The reliance on imports may also pose a longer-term problem, given insufficient timber is being produced to meet global demand.
UK Plastic Price
Polymer supplies continue to be constrained due to raw material shortages. This has pushed prices up by nearly 30% in the last 12 months and the lack of availability is causing production problems for plastics applications such as drainage and coatings.
At the start of 2021, the Construction Leadership Council (CLC) was instructed to set up a Products Availability taskforce to monitor key product constraints. A statement published by the Council in June 2021 confirmed that material shortages both within the UK and globally are expected to continue throughout 2021. Worryingly for the sector, only plasterboard availability has improved significantly over the past 12 months, with the vast majority of products still in short supply.
In addition, small fixtures and fixings, screws, plumbing and electrical parts that are largely imported into the UK are facing supply and demand imbalances.
The blocking of the Suez Canal, container shortages and increased container prices has halted some of the momentum of recovering lead times for these items. Once global shipping stabilises, these costs are forecast to reduce, albeit not to pre-COVID-19 levels, and supply chains can be re-established and normalised. However, this is not anticipated until Q4 2021 at the earliest.
Wage inflation and labour shortages
Wage inflation is also starting to arise, both as a result of increased activity and certain skilled labour - electricians, plasterers, joiners and plumbers - being in short supply.
Haulage labour shortages are also starting to bite after approximately 15,000 haulage drivers left the UK following Brexit. Despite the CLC’s and the Road Haulage Association’s (RHA) appeals for the rules on foreign workers to be eased, the regulations look set to remain.
The knock-on impact
All of these issues are combining to create something of a perfect storm across the building and construction supply chain.
Organisations now have little option but to pass on raw material price increases to customers and end users, otherwise margins - which are already low across the sector - will suffer.
There is also a direct impact on working capital and cash. For instance, credit limits have not increased to reflect the increased raw material prices, resulting in payments to suppliers being brought forward to remain within credit facilities. Additionally, the lack of product availability to complete projects is resulting in delays in final accounts being approved, invoiced and paid.
With projects stop-starting as materials dry up and then become available, many organisations are experiencing inefficient resource allocation. More administerial time is required to plan projects, and there is increased downtime as staff move between sites.
Finally, reverse charge VAT is significantly impacting cash balances and availability, specifically in supply and fit businesses where raw materials are also hard to source – for example, steel fabricators and glazing.
The good news is that despite these challenges, the UK and devolved Governments remain supportive of the sector, with increased infrastructure spending and commitments to new projects. This goes alongside the suppliers of debt capital continuing to provide leeway to businesses to trade through the impact of COVID-19 and Brexit.
Additionally, main contractors are supporting their supply chains and working more closely with subcontractors to understand and support with any issues on their contracts.
But given the volatility in both the supply chain and prices, further thought needs to be given by contractors and subcontractors on how they price and contract, including opportunities for uplifts and/or renegotiations for both future material price increases and decreases.
Ultimately, these challenges are making businesses across the sector consider what work they want to undertake; how they manage the current demand; how they quote for new work; and how they can contract differently to try and mitigate some of these risks.