Construction Output at the Mercy of Materials Costs

Construction Output at the Mercy of Materials Costs

22nd October 2018

Some worrying news for construction companies across the UK as the cost of building materials is predicted to increase by more than 5% over the coming twelve months.  This couldn’t come at a worse time as, according to a new report by consultancy Turner and Townsend (T&T), the UK market is starting to slow down.  Despite the fact that contractors had reported a 23% point rise in order books, which has resulted in a lack of confidence in a number of areas, with contractors in the London region expressing the most concern. 

The report revealed that the single biggest constraint on confidence and activity is the continuing uncertainty over Brexit, with negotiations still ongoing without any definite or clear concept of just what Brexit will entail for the UK economy.  The inflation in material costs is mainly a result of rising oil and steel prices which lead to an increase for construction companies in input costs. 

With clients insistent on keeping overall project costs down, tenders are being won by contractors who seem willing to accept less favourable terms.  Developers push back on rising costs to ensure scheme viability, whilst contractors who are nervous about maintaining a stable pipeline of work are reducing their margins and exploring new procurement models. 

Output in construction continues to enjoy a recovery with the latest Office of National Statistics (ONS) reporting an output rise of 2.9% in the three months to August, 2018.  However, output declined by 0.7% between July and August, partly as a result of a decrease in repair and maintenance work as well as all new work. 

This has led to some industry leaders calling for the government to offer incentives which would further boost housebuilding activity in the UK.  We are still producing fewer homes than are required and, despite initiatives to help  first time buyers onto the housing ladder, there is little being done to address the supply side that would help the construction sector build the homes that Britain needs for the future. 

Construction manufacturers, on the other hand, are taking a more optimistic stance, expecting sales to continue to rise resulting in a strong annual finish.  The Construction Products Association (CPA) latest survey has revealed an increase in product sales in the third quarter of 2018, despite being hit by poor weather as the year began.  Manufacturers expect this growth to continue throughout the last quarter, with 18% of heavy side firms and 43% of light side firms expecting an increase in sales.  Manufacturers also revealed that labour cost pressures have begun to subside, with two thirds reporting an increase in wages and salaries. 

Manufacturers do expect sales to increase in the fourth quarter of the year, but reveal that the political developments to come before the year ends will be a crucial factor in making sure the construction sector begins 2019 with a more positive outlook.