The last two years or so have been hard for many sectors. The impact of Brexit, Covid and now the war in Ukraine has led to considerable volatility in the construction market.

This, along with the general impact of the fuel crisis, has led to a change in contractor attitudes to risk and willingness to fix prices. Material prices, labour availability, building regulation changes and sub-contractor insolvencies have all led to pressures on main contractor boards having to be more robust in their risk profiling.

As of March 2022 reports are that project starts have reduced by 24% year on year. Thirty-one construction firms went insolvent in February 2022 and 24 in March 2022. In terms of materials, Construction News has recently reported:

“The statistics compiled by the Department for Business, Energy and Industrial Strategy show that particle board increased in cost by 44.8 per cent year on year to February 2022, followed by concrete-reinforcing bars, which jumped in price by 43.6 per cent, and fabricated structural steel, which rose by 35.9 per cent.
The latest calculation for material price inflation marks the final month before the Russian invasion of Ukraine on 24 February, which has further squeezed the availability of materials.”

These are just the main headline items, but similar trends, although at lower levels, are being experienced throughout the supply chain. The only item bucking the trend appears to be imported sawn or planed timber which has fallen since October last year.

At Baily Garner, we have experienced considerable feedback from contractors prior to and during tendering. Their willingness to fix prices without a considerable potentially unviable allowance, has led to difficulties in procuring developments within client’s original anticipated appraisal values at a fixed price. Willingness to hold or “sign on the dotted line” for contracts based upon earlier tendered prices has diminished, leading to delays and negotiations required, thus protracting ability to commence delivery of the much-needed homes and infrastructure the UK requires.

Whilst general inflation (CPI) for February 2022 has been confirmed as 6.2% year on year, forecasts are that this will only further increase. Whilst this has a bearing on construction, more importantly for this area of the economy is material inflation. The Construction Leadership Council’s current update highlights key areas where material costs have increased greater than CPI. Availability is also now being further pressurised post pandemic due to the accessibility of key components exported from Ukraine, transportation issues and general global demand versus supply economics.

BCIS predictions at present (which tend to lag two to three months behind actual costs) predict build cost inflation to be 2.5% for Q1/21 to Q1/22. But as the fuel crisis is still in its infancy (given predictions that in October further increases will occur) it is likely that this will be far greater.

Indeed, recent articles and research from both Gardner and Theobald as well as Turner and Townsend reflect on TPI increasing by anywhere between 5% and 8.5%. With minor regional differences, +/- 1%. The inflationary trend will likely continue over 23-25 albeit with a potential reduced rate but still much higher than experienced pre-pandemic.

It is likely that these will be reviewed again shortly upwards, given the fact that the Bank of England has this week raised interest rates, and stated it expects inflation to hit 10% by the end of the year.

Feedback from main contactors is that sub-contractors at present are unwilling to fix prices or are asking for higher sums to cover their risk. This in turn leads to main contractors’ unwillingness to fix without considerable increases to cover their risk. As such main contractors are asking for fluctuation provisions to cover this, which of course leads to price uncertainty for our clients who have been used to a stable market and a market where main contractors are willing to accept inflationary risk.

The main questions being asked are:

  • How can the market adjust to current circumstances?
  • How can clients procure best value with certainty and within their allowances?
  • How will funders for Affordable Housing reflect on potential artificial Start on Site (SOS) dates that diminish the ability for clients to spend more time on procurement and de-risking to secure funding which is vital for viability?
  • When will the market normalise?

All these questions are being discussed between the construction market, however there are variables, namely:

  1. How long will the Ukraine crisis last and what final impact will it have on raw material availability and the price of gas and oil?
  2. What will transportation routes look like in a year’s time, what will lead in times be and what additional costs will stem from these?
  3. What geopolitical impacts will Russia’s stance have on global markets? USA providing more oil and gas, OPEC increasing supply. China increasing prices as they have significant say in raw material availability.
  4. What further impact will China’s covid lockdowns have on material and product availability?
  5. How will additional fuel pressures on Europe (Germany/France) and their willingness to move away from Russian Oil and gas (at a cost) have a further impact on mechanical and electrical machinery moving forward?

We must also reflect on how other fields within the industry can assist in reducing delays to SOS and enable prompter de-risking prior to tendering. Areas to consider will include planning response times and required resources to meet engagement and decision making. Statutory Authorities engagement and performance in responding to quotes, Legal Agreements, Easements etc. and Local Authority resources and realistic requirements for Section 278, licencing timeframes and the like.

Given the uncertainty of the market, we are experiencing prices for schemes of over £30m that are ranging from between £4,100 to £4,500, and that is excluding fixed pricing. There are decisions that need to be made dependant on our client’s appetite for risk, and constraints relating to unit delivery and political issues. As such there may be room for early enabling works packages (nontwo-stage PCSA due to the potential tie in with one contractor) de-risk matters relating to services provision, detailed co-ordinated design, contamination remediation and the like.

We all need to continue to engage with clients, contractors and supply chain to anticipate appetite and competitiveness for various procurement routes. We also must gather thoughts on single/two stage and direct call off, and contract forms alongside collaborative and effective ways to derisk costs and allow for open and honest assessments of best value given current conditions and engage with funders who must clearly see the pressures for the market. If the industry does not work together we will only see a stagnation in delivery for 2022.