Construction sector

'Last minute procurement is simply not an option,' warns development lender over material price hikes

Material supply shortages and shrinking subcontractor availability has slammed the brakes on the construction sector, with one development lender urging property developers to have a cogent strategy to procure and programme items needed.

The recovery in UK construction output has lost momentum since June’s 24-year high, with slower growth across all three main categories of work, according to July PMI data by HIS Markit and CIPS.

While housebuilding was the best performing category in July, followed closely by commercial building, the rate of expansion for both cases was the weakest since February. 

Demand for construction materials is continuing to outstrip supply, with the latest data signalling another steep increase in purchasing prices — around 81% of the survey panel reported a rise in their average cost burdens.

Higher charges among subcontractors and difficulties filling staff vacancies also added to price pressures. 

Construction companies highlighted that reduced materials availability acted as a brake on purchasing volumes in July, with some firms noting that the post-lockdown spike in customer demand has also started to wane. 

“It was unsurprising that UK construction companies were unable to maintain output growth at the 24-year high seen in June, especially with widespread supply shortages and constrained capacity to take on additional orders,” commented Tim Moore, director at ISH Markit.

“The loss of momentum spanned all major categories of construction work and was most pronounced in the housebuilding sector.

"Long lead times for materials and shrinking subcontractor availability were cited as factors holding back work on site. 

“Around two-thirds of the survey panel experienced longer wait times for supplier deliveries in July, while just 2% reported an improvement since the previous month.

"Another rapid increase in purchasing costs was linked to global supply and demand imbalances, but many firms also noted that local issues had amplified inflationary pressures. 

“These included a severe lack of haulage availability, continued reports of Brexit trade frictions, and greater shortages of contractors due to exceptionally strong demand."

Property finance industry responds

Andrew Pinfield, head of risk at Maslow Capital:

“It’s well documented that despite the challenges of Brexit and Covid, the UK is experiencing a construction boom, with developers facing significant price hikes in certain materials, such as steel, timber and concrete. Maslow continues to back developers and projects with strong professional teams and a cogent strategy to procure and programme these items. Last minute procurement is simply not an option.”

Ben Colling, director of portfolio management at Maslow Capital:

“Careful analysis needs to be undertaken at the initial underwriting stages through the elemental trade breakdown, BCIS indices, contract sum analysis and the percentage of key trade packages ‘locked in’ to alleviate any substructure/superstructure ground-up risk. It is essential that these budgeted costs are not understated and are sufficient to deliver for the entire construction lifecycle. 

“We also look to ensure any inflationary pressures have been factored into the contract price and assess whether reliance on the supply of materials abroad as well as on shipping/freight is applicable. 

“Maslow is well versed to the needs of the developer and continues to support the requirement of procuring materials in advance so that the likelihood of critical path delays are minimised.” 

Andrew Dixon, commercial director for specialist finance at Aldermore:

“For SMEs in the construction sector that operate a ‘just in time’ delivery supply chain, even the slightest delays in materials or price hikes can have serious knock-on financial consequences.

“One of the first steps SMEs can take to prepare for either shortages or cost increases is to assess how their supply chain will be impacted. Businesses should have a clear understanding of where the products they import originate from and whether they could source substitutes instead. A good way to do this is to create a supply chain map which shows the full picture of a supply chain network. This will make it much easier to visualise where potential change is needed and highlight potential risk areas.”

Max Jones, director of infrastructure and construction at Lloyds Bank:

“Shortages in materials are still impacting contractors who will likely feel they had weathered the Covid storm. The situation is manageable for now but, should it change, many will begin to feel the pressure. Contractors better placed to deal with any shortages are those with the balance sheets to plan ahead in advance and buy up supplies to shore up pipelines further down the line. This contrasts against those small players who focus on the job at hand and don’t tend to have deep enough pockets to buy up stock ahead of time.”

Tony Houlihan, director at Friday Club Developments:

"As a relatively new company in the process of building a supply chain, we have found the materials supply issues over the past 18 months very challenging, and our view is it will continue until the middle of 2022 at least.

"I think Brexit, shipping and production are definitely part of it, but the strength of demand in the construction market is the largest factor in my opinion, everyone in the industry is so busy.

"I feel like the smaller companies with less ability to hold stock, and which don’t have professional procurement teams and established supply chains in place, will be hit hardest. Companies on fixed-price agreements with their clients could easily find themselves in a very tricky situation if they are not proactive about the challenges in play.

"Our business has tried to mitigate the impact of the price increases and material shortages in several ways: we have increased our contingencies on our projects for both materials and labour, are working collaboratively with our subcontractors to value engineer where possible, given our materials suppliers firm commitments as soon as possible to lock in prices well ahead of our program, and expanded our supply chain to reduce dependency on one or two outlets in certain categories."

Dave Sheridan, executive chairman at Ilke Homes:

“Increased material prices, backlogs in the supply chain, and labour shortages — both of construction workers and HGV drivers — are putting significant pressures onto builders, developers and contractors. 

“It’s little wonder that this perfect storm of factors has led to the slowest rise in construction output since February, as both residential and commercial developments compete for both materials and labour to deliver projects on time.”

Andrew Shepherd, managing director at TopHat:

“The construction sector continues to face various challenges, not least the lack of labour and constrained availability of materials. However, the modular housing sector is well positioned to deal with these bottlenecks. Through the use of more diversified supply chains and an emphasis on reducing waste throughout the construction process, the MMC sector is well insulated from ongoing turbulence accelerated by shortages. 

“Technologies, such as building information modelling, can generate precise estimates of materials needed for each job, while offsite manufacturing — where homes are manufactured along production lines — ensures high levels of recycling are achieved."

Joseph Daniels, CEO and founder of Etopia Group:

"Housebuilders have so far weathered a double whammy of rising construction costs and logistical delays in procurement, sustaining a level of productivity well above other development categories.

"While it's natural to see a temporary seasonal slowdown, and a brake caused by lagging material availability, this could be the beginning of a more gradual slowdown in productivity if those supply chain bottlenecks are not alleviated. 

“A growing contingent is sourcing alternative building materials and widening their supply chain partnerships as a hedge, and it's clear to see why."

Chris Bone, CEO at Modulous:

"The rising cost of essential construction materials continues to squeeze the pips out of SME homebuilders, while lagging output exposes weaknesses across industry supply chains. 

"Competition is at an all-time low, as only a select few players can absorb the costs associated with the perfect storm of rocketing global demand, supply-side shortages, and higher shipping costs.

"It's clear that the industry as a whole is going to have to reduce wastage to mitigate costs, and review their procurement strategies as they compete with other industries which are experiencing similar issues.”

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