With more fluctuations in the pound during the recent political upheaval, dealing with volatile input costs will be high on contractors’ agendas.
The Arcadis Input Cost Index for Q1 2017 rose 6.5 per cent in the year and 1.1 per cent over the quarter, yet the startling events of recent weeks have seen a resurgence in short-term uncertainty.
Political turmoil has hit the currency markets, with the pound falling 2 per cent and 1.5 per cent against the dollar and euro respectively following the shock election result. This leaves us with a twofold effect: while it keeps Britain attractive to foreign investors looking to maximise their buying power, it also maintains pressure on construction costs for contractors in the UK.
The question is: just how much pressure?
Material fears here and abroad
Many materials are of course imported, and the government recorded an increase in our construction materials trade deficit of 7.4 per cent in Q1, adding to currency-related cost inflation. And while the price of oil has at least been relatively steady this year, UK buyers will still be vulnerable to disproportionate rises in the cost because of exchange rate volatility.
Cost concerns extend well beyond these shores too, with the IMF’s metal price index up 35 per cent in the year. UK buyers have benefited so far from globally low commodity prices, so sharp rises like this will no doubt add to fears over cost hikes unrelated to currency.
Steel reinforcement meanwhile shot up 7 per cent in the latest Arcadis survey, with hikes as eye-watering as 25 per cent reported. Scrap steel – a key ingredient in some steel rebar – has doubled in price over the same period, heaping further pressures on contractors. Structural steel has also seen upward pressure, with a 9 per cent rise in the year to Q1.
There is, however, some encouragement to be found among the sector’s leading firms such as Severfield, which this month posted bullish results that saw revenue up 10 per cent and pre-tax profit doubling on the back of surging orders. Yet with uncertainty comes the danger of falling demand.
And materials inflation is far from the only threat to workloads.
Delivery in doubt?
Labour costs continue to soar, with day rates for bricklayers and carpenters up 8.7 and 8.1 per cent in the year respectively.
What’s more, Arcadis reports that 25 per cent of workers on an average London site are from the EU – with anecdotal evidence suggesting far higher proportions on certain projects. This raises big questions over future project delivery, should whatever Brexit deal is struck fail to maintain this labour supply.
But it’s not all doom and gloom.
Recent evidence suggests the rate of labour cost inflation may finally be slowing. The BCIS forecasts zero change for Q2, while the ONS reckons growth in average weekly construction earnings has been slowing since the start of 2017.
So while material pressures are stacking up, labour prices are set to apply less pressure – though this will of course vary across regions and trades.
Above all, the latest Arcadis survey paints a picture of stagnating and squeezed margins, suggesting the supply chain has so far failed to fully pass on input cost rises – particularly in materials.
The bottom line is that this is not sustainable. What happens next will depend hugely on future demand levels in key sectors and subsequent impacts on tender pricing.
Yet we must also not forget that construction has weathered the last 12 months of varying volatility relatively well. The best course of action, as ever, will be for clients and contractors to keep collaborating while seeking ways to boost efficiency and reduce costs.
Asma Arif is a research analyst at Arcadis