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Pressure facing Construction sector

18 July 2022

cranes on construction site

It has been widely reported that there a lot of stresses facing the construction industry.  The most obvious constraint now is the rising costs of materials.  One issue that builders face more than any other industries is the often-long lead time from pricing a job to starting work.  What is more, whilst a project is ongoing it is possible that the costs of materials rise during the job.  Fixing prices in advance is not a common practice in the industry as delays in starting and finishing projects due to external factors are common. 

Industry-wide problems have been widely reported with builders saying that bricks and tiles are taking months to arrive that would normally have come in a couple of weeks.  This is especially frustrating as post pandemic there has been a surge in the demand for additional space.  However, following this surge in some areas, people and businesses are suddenly holding back as the cost-of-living increase hurts pockets. 

Another problem is of course a shortage of labour, as post pandemic many Eastern Europeans, and other migrant workers, have gone back to their home countries or simply moved out of the industry.  And for those in the industry, wage inflation is an issue as the in demand workers are asking for pay increases to cope with their own increased living costs. 

All this uncertainty, fluctuations in demand, and an ever more increase in materials costs have put the construction sector under immense pressure.   

The number of insolvencies in the construction sector jumped by 142pc to 307 in February, up from 127 during the same month a year earlier, according to the Insolvency Service.   

Another 384 smaller UK construction businesses went bust in April, marking an around 50pc rise compared with January 2020, according to the latest figures by the Office for National Statistics (ONS). 

However, it should be remembered that creditors couldn’t take action to recover debts last year.  Only since March 2022 could winding up petitions be served. 

In 2021, the industry’s Construction Products Association (CPA) reported 20pc growth in the repair, maintenance and improvement market as households used savings from lockdowns to fit out their home offices as the working pattern shifted – and embarked upon loft extensions. 

Now, the CPA has warned the market would decline by 3pc this year and 4pc in 2023, amid spiralling inflation. Building materials inflation spiked at 22.5pc in May due to supply chain disruption and rising energy prices. 

Among key materials used by housebuilders on a daily basis, prices for timber and steel products jumped 30pc and 45pc respectively in April, according to government figures, while major brick producer Forterra increased its brick prices by 12pc from April 1 2022. 

On top of inflation, China’s strict lockdown measures and the war in Ukraine are compounding existing supply chain disruption from coronavirus backlogs and putting home improvement projects on hold. 

Beijing’s zero-Covid policies have caused shipping costs to soar due to delays at ports, while Russia’s invasion of Ukraine has cut supplies of key regional exports of nickel, copper and iron. 

David O’Leary, policy director at the Home Builders Federation (HBF), says: “The situation in Ukraine compounded by the high demand for building materials through the pandemic and in the period since has made things particularly crunchy.’’. 

“The wider energy costs are obviously a big factor in the production of building materials as well. So, it’s a triple whammy for the sector.’’ 

“For the new build sector this has all increased the cost of building materials, but there are also additional taxes, levies and regulations that have come onto the industry as well.” 

Meanwhile, labour shortages are also hampering the construction sector, with the Structural Timber Association recently warning staff shortages could pose an even bigger problem than a lack of building supplies.` 

Interpath’s Morley argues housebuilders’ situation isn’t set to improve anytime soon: he predicts more significant distress in the final months of 2022. 

“Administrations will start to increase because there will be pressure as we start to see an easing in demand for commercial buildings as people see that the UK economy is starting to slow slightly. And that will pick up towards the back end of this year.” 

HBF’s O’Leary says: “The industry as a whole is better-equipped today than it was ahead of the financial crisis.’’ 

“But for the small players this is extremely difficult. They are facing a huge number of challenges. For them, it’s less about the inflation of prices, but the availability. They’ve also got labour cost increases.” 

Despite all of pressure on builders this it is interesting to note that May and April the predicted surge in construction insolvencies has so far failed to materialise.  May saw the number of firms going to the wall fall for the second successive month. 

Figures from the Insolvency Service show 349 companies in the sector collapsed in the month, down from 384 in April. 

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