As every developer is aware, the cost of building materials has risen at an extraordinary rate in the last year and continues to rise. According to official data from data.gov.uk, the price of construction materials rose in 11 of the 12 months of 2021, with November providing the only respite as prices remained stable. Between 2020 and 2021, the cost of timber and joinery materials rose up to 50% and metal products such as Fabricated Structural Steel rose over 60%. The Royal Institution of Chartered Surveyors noted that in 2021, prices reached a 40-year high and have forecasted the BCIS cost indices will reach 17.6% in 2022. So what is causing this rise?
It may seem old hat to be blaming the pandemic for all our woes, however, the reasons for its effects on the construction industry are multiple and varied. Throughout the pandemic, global lockdowns have forced the closure of borders and a complete halt in the manufacturing of some materials. As countries have reopened at different times, it has caused major disruption to the demand and supply curves, driving prices upwards as materials became more scarce.
To add to this pressure, regional lockdowns created a huge surge in domestic renovations as people were afforded the time to undertake wanted DIY projects, with many people also wanting to create home-working spaces. This had a knock-on effect on the demand of basic construction materials including timber and concrete, with the price of MDF rising 47% in 2021.
Contractors have reported paying on average a fifth more for their materials since January of this year. Larger scale businesses have generally been able to absorb these costs due to bulk buying and better direct connections with manufacturers, however smaller businesses which offer ‘fixed price’ contracts have been more vulnerable to the inflation in prices, with some contractors reporting losses on projects.
Brexit is another dreaded topic, however, the notable disruption to the supply in HGV drivers post-Brexit has caused huge interference to the supply chain of many imported materials. According to the ONS, some 70,000 HGV drivers have left their roles since the beginning of 2020, with an estimated 12,500 of these being EU nationals. In an attempt to combat the number of drivers leaving the profession, the government has implemented accelerated visa schemes for those who import fuel and food goods, but not construction materials. Brexit has also changed the rules on importing goods meaning traders who import goods from the UK now have to meet relevant Rules of Origin for their products and make declarations to that effect. Additional border checks and administrative works are costly both in time and money, the burden of which is being felt by the traders who in turn are passing the costs on to the customer, driving up prices. There are also new restrictions on products which do not originate from the UK or EU, which are likely to slow the progress of construction projects.
Political Instability in Eastern Europe
The Russia-Ukraine conflict has had a negative impact on the supply of construction materials throughout Europe both due to issues with export and the sanctions many nations have imposed on Russia as a consequence of their invasion. Both Russia and Ukraine are critical suppliers of metals, raw materials, chemical products and machinery, with approximately 10% of the global copper reserves under Russian control. Copper is widely used in plumbing, electrical wiring, cladding, flashing and solar panels, and prices have risen 25% in the last 2 years. Ukraine is also a leading exporter of aluminium meaning lead times for items such as window frames has increased, exacerbating price inflation.
Energy Price Rise
Construction is an energy-intensive industry and with wholesale energy prices having risen 54% on average in April 2022, the pockets of developers are feeling the pinch. Numerous factors have affected the supply and demand of gas and electricity, including the sanctions placed on Russia regarding the export of gas and oil. In addition, unseasonably warm weather throughout Asia saw larger than usual consumption of gas used for air conditioning. This in turn has had a knock-on effect on the supply to the steel, glass and cement industries which require large amounts of energy in production, the cost of which is being passed on to the consumer.
How can developers help themselves?
Fortunately, it is not all doom and gloom and there are ways in which developers can protect their projects from price inflation for materials.
• Diversify sources of supply by widening the range of companies being used to produce goods or sell raw materials. It would be wise to be in contact with companies which use varying routes of supply across the continent and internationally to ensure your demand can be met and help keep expenditure down.
• Review contracts with both suppliers and your clients. This may mean having shorter time limits on any quotes you provide or being more stringent with contracts you may sign with your suppliers. Open-ended contracts are a recipe for disaster in a rapidly changing economy.
• Implement a two-stage tendering process whereby there is a revisionary period between design and construction. This will allow time for the sourcing of new materials or utilizing new construction methodologies to circumnavigate any shortages in supply
• Regularly review the building schedule and monthly cash sum analyses to ensure expenditure is on track; if it isn’t then the cost plan must be remediated at each stage to ensure the build doesn’t go over budget. • Where appropriate, use provisional sums for certain works to allow for flexibility in pricing.
• Assessing whether it is financially efficient to stock-pile your most used items. This seems like a sensible option to some degree, however when many developers have this mindset it can intensify the problem. So to help market buoyancy it would be wiser to do this on a job by job basis rather than making it a standard policy. This would require more upfront payments from clients, which in turn helps cash flow.
• Undertaking due diligence with regards to sanctions that are or may be imposed on the export of goods from countries that supply materials.
• Factor in a healthy contingency. Most developers account for between 5-10%, however increasing this by as little as 2-2.5% can go a long way toward mitigating any rapid price surges.
CrowdProperty’s team of property experts continues to provide practical and knowledgeable ways to mitigate the risks to project progression, as we have done since the start of the pandemic – get in touch to run your project by the team. We have recently launched customer surveys to better understand what is important to the developers we work with and how we meet your expectations. We’ve had some great feedback so far – please do get in touch with your views on what we do well and how we can improve at firstname.lastname@example.org