Founder and director at specialist construction consultancy, Consult North, Javaad Khalil shares his insight into the key challenges which Developers, Contractors, Consultants and Suppliers in the construction sector are currently facing.
The stay-at-home orders issued throughout Covid-19 led to increased spending on home enhancements and moving to, or creating larger homes. While this is fantastic news for building contractors, they are also finding themselves battling for fresh supplies due to strained supply chains. The demand for materials currently far outweighs the supply and due to this, the cost of construction works are vastly inflated.
Material shortage continues to be a major setback for many in the construction industry with timber and steel being the most cited materials which contractors are having issues sourcing. Timber supplies are slim across the globe and with other countries willing to pay more than the UK, this is further aggravating the situation. The Timber Trade Federation (TTF) warned that supplies will tighten further in Q3 2021.
Structural Steel and Re-bar prices have shown double digit inflation from the comparable quarter in 2020. The latest hikes come as British Steel announces further price increases due to the cost increases and availability of raw materials. The manufacturer warned that due to supply order acceptance would be via customer allocation only.
The movement of goods through the EU due to Brexit only adds more pain. Shipping costs are being recorded at the highest ever, said to be caused by Brexit, Covid and Suez. Until a strong recovery in imported goods is made or alternative sources from within the UK are established, the country will continue to face the same difficulties not just in construction but other sectors too.
Tendering in a market where you have material shortages and their scarce availability means further challenges for Developers. Recent tender returns are being adversely affected by material shortages but also the delivery times given by suppliers. Potential tenderers are reluctant to fix the prices of their tenders and are stating that they are subject to fluctuations. It is understandable in the current market, no one wants to be out of pocket due to material costs spiralling out of control with no indication as to when normal levels of supply will resume.
A fluctuating tender brings cost uncertainty, however, when factors such as long supplier delivery times are considered, contractors will also be reluctant to fix programmes.
Developers may choose to halt their projects until the market cools or, even worse, scrap plans to build at all. Especially those looking to hit certain yields, without knowing the final costs the yields may be greatly at risk.
The VAT reverse charge finally came into effect on 1st March 2021 and made a considerable change to vat regulations. The new regulations mean that customers are able to charge themselves VAT and pay it directly to HM Revenue and Customs rather than the supplier sending them an invoice.
This has put huge strain on the cashflow of SMEs who act as suppliers. This is because they will not receive any VAT from customers, yet will still have to pay it on whatever they purchase – a seemingly unfair model. Brought into play with good intentions, however, putting all important cashflow of some sub-contractors under pressure.
Skills shortage
The UK is facing a significant skills shortage which is posing further issues for companies and more specifically projects, including;
Employment in the construction sector fell from 2.3m in 2017 to 2.1m at the end of 2020, representing a 4 per cent fall in UK-born workers and a 42 per cent fall in EU workers, according to the Office for National Statistics (ONS).
Furthermore, over 20% of employees in construction are within the 51-60 age range and are close to retirement, this leads to a significant loss of skills among the workforce without the same level of new talent coming through.
The UK government are looking to bring all greenhouse gas emissions to net zero by 2050.
These targets continue to be a struggle for construction business that are responsible for generating 45% of the total carbon emissions in the UK.
All projects have a huge environmental impact, plant, equipment, vans, trucks, machinery, and tools all require a substantial amount of energy.
Earlier this month, the Carbon Reduction Code for the Built Environment was launched. The code is intended as the first step in helping to reduce carbon emissions in the design, construction and maintenance of built assets.
Summary
The greatest threat to the industry is the continuing materials shortage as a result of Brexit and the covid-19 pandemic. It could be argued that the timing of the two served as the perfect storm for supply chain issues. This would suggest that the issues are temporary and over time will alleviate towards the end of 2021 yet for now companies are really having to concentrate on their supply and put an emphasis on stock and cost control. The are ways and means to navigate these challenging times, it calls for the highest level of collaboration from all parties involved.
