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  • Connaire McGreevy

WARNING: Bumpy road ahead

Back in December I spoke of the headwinds and at that point in time the construction sector was beginning to feel some of the price shocks. Unfortunately, even with a deal agreed between the EU and UK the upward pressures of material costs have spiralled. This is a massive risk on everyone’s risk register or at least it should be.


We conducted a 200-line item review over the last few weeks taking a dive into item costs in July 2020 and April 2021. While the average increase is 8.84% it masks the real input cost increases. Some items that are used with a high frequency such as softwood timber and fence boards took a 7.5% increase in October 2020 followed by another 5.5% increase in April 2021 and another 5% increase projected for July 2021. Just a couple of weeks ago the Timber Trade Federation reacted to the growing concerns of industry with their own spin.[1] They argued that the issue is a demand problem with demand outstripping supply. The produced a nice graph and stated the average cost was up “only 5%” but that was comparing to January 2018.


In reality construction projects are priced 3-6 months out and usually the prices are based on tenders from suppliers. For those locked into longer term maintenance contracts the sharp rise from around June/July 2020 to now is telling in their graph[2]. Using Great Britain’s Forestry Research, it is clear to see that softwood has taken a massive jump in price. They state “the average price for softwood sawlog sales was £67.70 per cubic metre overbark in nominal terms in the 6-month period to March 2021”[3]. When rolling back 5 years they show a 93% increase on price.


Timber is not the only input material experiencing these dizzy heights. It is across most materials such as insulation, plastics, cement and steel. On top of this there is a rapid and concerning rise in labour rates. This is not limited to subcontractors but also direct labour. The ONS have published data[4] on this showing a 13.5% increase for the July to September 2020 period. Certainly, if anything this has accelerated post the New Year. Hudson Contract were reporting a monthly average rise in March 2021 of 3.7% for self-employed tradespeople[5] but 20% increase on a year ago[6].


So, what does this all mean?


With hindsight the last 12 months was probably the worst time to tender. Contractors will have looked at rates from suppliers and labour that were unusually low in comparison to the previous 5 years. Perhaps human nature set in and as the Global Pandemic Crisis emerged people were trying to secure work. With the vaccine rollout and hopefully some normality the prices have risen back to where they were pre-Covid and in some case


s above. The cost consultant firm Arcadis are predicting a normality of annual 5% rises for the next few years[7].


Steel has been rocked too, with double increases inside a month![8] My prediction is a rocky road for both clients and contractors that are locked in place on building contracts. There most likely will be tenders with very wide price ranges perhaps as much as 50% separating the lowest and the highest. A financial viability test will be a prerequisite but even that cannot guarantee no disruption to service provisions and contract delivery.


In Northern Ireland, the maintenance sector was rocked by Carillion collapse not that long ago but we only have to cast our minds back to the outworking’s of the last Global Financial Crisis to see the multiple collapses of firms tendering too low. 2021 and indeed 2022 and 2023 will most likely be very rocky in the sector and there does not appear to be any way to prevent it. A common sense approach will need to be applied by contractors bidding work and not the old "get on the dance floor" failed tactics of the past.


ENDS



References

[1] https://ttf.co.uk/ttf-issues-market-statement-on-demand-and-supply-of-timber-in-the-uk/ [2] https://ttf.co.uk/wp-content/uploads/2021/05/TTF-Market-Statement-Graphic-one-1024x708.jpg [3] https://www.forestresearch.gov.uk/tools-and-resources/statistics/statistics-by-topic/timber-statistics/timber-price-indices/ [4] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/indexoflabourcostsperhourilch/julytoseptember2020 [5] https://www.hudsoncontract.co.uk/news-resources/freelance-builder-pay-trends-march-2021/ [6] https://www.constructionenquirer.com/2021/05/18/5-annual-cost-inflation-to-become-new-normal/ [7] https://www.constructionenquirer.com/2021/05/18/5-annual-cost-inflation-to-become-new-normal/ [8] https://www.constructionenquirer.com/2021/05/19/steelwork-firms-rocked-by-second-big-price-hike-this-month/

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