Construction sector hit by lack of supplies and price rises
Office for National Statistics (ONS) reported that monthly construction fell by 2.0% in April 2021 because of declines in both new work (2.9%) and repair and maintenance (0.6%). This decrease is being attributed in part to issues the sector is facing with regard material shortages and rising prices.
Mick Heaton from Cowgills’ client Bolton Builders Merchants commented ‘Supply constraints on timber, cement products and bricks in particular have created a bottle neck in the supply chain resulting in increases to prices and availability. This is on top of the already increasing financial implications from importing into an EU free zone.’
Here we look at some of the key issues which the construction sector is facing that are having a detrimental impact on pricing and supply.
Building materials are running short in the UK, putting building companies under pressure
The construction materials shortage can in part be traced back to increased building and home improvement activity in 2020, particularly during the first lockdown. This led to a slowdown in the production of materials from some factories in the EU, and supply chains have remained stretched ever since.
Construction industry projects have continued to surge since lockdown began easing which has led to skyrocketing demand for already scarce materials.
The surge in demand means some SME builders are currently unable to purchase essential materials, like timber, cement and roof tiles, as readily off the shelves. This not only impacts their ability to complete projects, but also the cash flow of their business.
There is currently a global shortage of raw materials, stemming from global demand and other external factors (including the slowdown and in some instances, factory closures, outside the UK). This continues to constrain production of certain products, such as insulation, paints and adhesives, as well as packaging for products.
Labour rates have skyrocketed in some areas in recent months, due to a combination of demand outstripping labour supply, and some trades putting up their rates due to being overwhelmed with work.
According to the ONS employment in the construction sector fell from 2.3m in 2017 to 2.1m at the end of 2020. This represents a 4% fall in UK-born workers and a 42% fall in EU workers.
The number of UK construction vacancies has now risen to 35,000, which is the highest figure since records began 20 years ago.
Shipping costs have also increased sharply due to a shortage of empty containers from Covid-related issues and the recovery in global demand post-pandemic.
The Construction Productions Association reported that the cost of shipping a 40ft container from Asia to northern Europe, for instance, rose from around £1,000 last summer to more than £5,800 by this month.
Roughly 60% of imported materials used in UK construction projects comes from the EU, according to the Construction Leadership Council (CLC), and increased congestion has been reported at UK ports since the turn of the year, leading to delays.
The UK-EU trade deal eased Brexit construction fears once it was confirmed that no additional tariffs on imports or quotas would be added, but the impact of Brexit has already led to disruption, lengthening supply lines for a number of core supplies from Europe.
What are the consequences?
The ONS has projected an increase of up to eight per cent in material prices, with increases for certain materials, such as timber, expected to more than double during the course of the year.
Materials shortage and increased lead time
The Construction Leadership Council (CLC) has warned that cement, some electrical components, timber, steel and paints are all currently in short supply, blaming ‘unprecedented levels of demand’ that are set to continue.
With demand globally increasing and the UK importing many of its raw materials, lead times for orders are lengthening while prices are shooting up.
Smaller builders risk being hit hardest by material shortages and price rises as unlike larger firms they can’t stockpile or plan jobs far in advance. They need to be assured that the materials will be at the merchants when they need them. The Federation of Master Builders said that some building firms may have to delay projects and others could be forced to close as a result.
Mick at BBM reflects on the situation saying that: ‘As a result of the issues surrounding materials shortages, many of our customers are finding that current jobs are being delayed and are being financially impacted by the last-minute price increases on commodity materials.
‘The current climate is also leaving many of the smaller and medium trades wary of pricing future jobs in the fear of committing to work that could potentially leave them out of pocket 6-12 months down the line.
‘We have found ourselves in a fortunate position with BBM as we have the advantage of the independent merchant’s flexibility to purchase without the constraints of the usual PLC formats of central allocation systems where stock is managed via networks leaving individual branches inflexible to demand. Ultimately independents can control stock allocation via salesman leaving all customers catered for.
‘We also have the flexibility to deal outside of the large national buying agreements allowing us to switch brand and manufacturer as and when necessary to maintain a smooth chain of supply to our customers.’
Cowgills is a leading independent firm of Chartered Accountants and Business Advisors based in the North West of England – from Greater Manchester to Liverpool. We use our sector experience to deliver tailored financial solutions and support for businesses.
Get in touch with our Head Office in Bolton, Greater Manchester, for any financial advice on 01204 414 243.
The information was correct at time of publishing but may now be out of date.