Wider context
We thought things were getting better at the end of 2021. Little did we know what was coming our way…
Following Brexit and a pandemic that already had the industry reeling from materials, labour and site productivity issues, Russia's devastating invasion of Ukraine has renewed these challenges.
Increased COVID-19 cases in the UK and globally, particularly in China, are another concern. And whilst labour and skills shortages have been a long-term issue for the construction industry, these are becoming more apparent with increased activity and numerous large infrastructure programmes.
These challenges come at a pivotal moment for the climate — with the latest report from The Intergovernmental Panel of Climate Change (IPCC) saying that it is "now or never" to limit temperature rises.
It's clearly an uncertain time, but one thing that is for sure is we'll need a collaborative spirit and to foster the innovative approaches adopted by the construction industry during the pandemic to get us through this period of volatility.
Materials
Following significant increases during 2021, materials price escalation slowed at the end of last year.
This is well represented by the Department for Business Energy and Industrial Strategy’s (BEIS) ‘All Work’ Construction Material Price Index, which reported no change in the month to November 2021 and a 0.4 percent increase in the month to December 2021.
The ‘All Work’ Construction Material Price Index increased by 0.9 percent in the month to January 2022 and 1.2 percent in February 2022, associated with escalating energy costs. Further materials price increases are anticipated as energy and commodities prices have surged since the conflict, in addition to increases previously seen.
Significant volatility has been seen in commodities and energy pricing and the market appears to be steadying in some instances, albeit at a higher level than before the war.
Aluminium \ Prices on 8 April were 19 percent higher than at the start of 2022 at $3,374.50/t. However, this was a reduction from the $3,849/t seen on 4 March. Generally, pricing has been more stable so far in April with a high of £3,465/t.
Copper \ Copper prices have increased by 7 percent in 2022 reaching $4.7250/pound on 8 April. A high of $4.9375/pound was seen on 4 March.
Brent crude oil \ Following the invasion of Ukraine, Brent crude oil surged above $100 per barrel for the first time since 2014 reaching $127.98 per barrel on 8 March. Prices were around $100 per barrel on 6, 7 and 8 April after the International Energy Agency (IEA) announced that its non-USA member countries would provide 60 million barrels of oil and the USA confirmed that it will tap into its special petroleum reserves to increase supply and cool elevated prices.
Natural gas \ Natural gas prices, which surged in 2021, have also seen renewed increases. Gas is harder to find alternatives for as there are practical obstacles surrounding expanding production and infrastructure. As such, there is still volatility in pricing. On 8 April, 1 Mmbtu was $6.278 compared to $3.815 on 3 January — an increase of 65 percent. It is also a rise of 39 percent from the $4.527 rate seen on 8 March.
Data from Investing.com
Increased energy costs will impact the production of materials. In particular, rising natural gas costs will impact kilns and furnaces and, therefore, the production of materials such as bricks, terracotta, steel, glass and aluminium.
Hot rates
Other challenges
Impact on procurement and tendering
Contractors are selective
Due to the volatility in the market contractors are being more selective over the projects and clients that they tender for.
There is limited appetite for single stage Design and Build.
Reduced validity periods
Overall acceptance periods have reduced, certain elements such as steel have short windows for acceptance.
Fixed price premiums
Contractors are looking for premiums to fix prices, particularly for longer programmes, due to the risks.
Tender clarifications
Clarifications are seen related to supply prices of materials (e.g. steel and reinforcement) and currency. Some contractors are proposing to link to indices/share the risk on materials price increases, etc.
Revised inflation forecasts
Since we published our Winter market report, the Russia-Ukraine war has brought renewed pressures. Widespread material price increases are seen and supply chain disruption is increasing the uncertainty.
Inflation is forecast to be higher than previous estimates due to the issues — as such, we have revised our typical 2022 forecast to 5.5 percent.
Factors such as the nature of the project, specification and market appetite will influence the uplift seen. Inflation should be assessed for each project.
Our Spring market report will be released in May and will contain updated regional forecasts.
Wider impacts
Supply chain pressures and insolvencies
Expenditure associated with prolonged programmes, additional costs for COVID-19 precautions and material price increases see some of the supply chain under substantial pressure, particularly where fixed prices were agreed upon before significant issues emerged.
Unfortunately, the number of construction insolvencies has been increasing. Data from the Insolvency Service showed that an average of 266 construction businesses collapsed each month in the three months to October 2021.
Insolvencies have widespread implications, including impacts on suppliers/subcontractors who may not be paid. Insolvencies can also unsettle local markets, reducing the companies available to undertake work, which can be a particular issue in some areas where it takes a long time to build up market competition and expertise.
Materials availability impacting net zero carbon aspirations
Earlier in the report, we mentioned that Russia and Belarus have lost the right to supply timber for PEFC and FSC certified products. This impacts availability and may affect net zero carbon targets — may need to consider alternative materials or sustainability credits.
Programme prolongation
Analysis undertaken by nPlan, a company that uses machine learning to identify potential delays, has shown that nearly nine in 10 large construction projects (over £100 million) are behind schedule following disruption from the COVID-19 pandemic. Almost a quarter are shown to be more than 250 days delayed, and in comparing programmes that were completed before and during the pandemic, it showed that delays had doubled.
There is concern that programmes may be prolonged by materials availability issues due to the Russia-Ukraine war. Lead-in times are expected to be extended, which may impact projects under construction or delay start dates.
Mitigation measures
Regularly updating budgets for latest cost advice
Due to market volatility, project budgets should be monitored and updated regularly.
Moving away from just in time mindset/engaging earlier with the supply chain
It is important to engage early with the supply chain to mitigate issues. It is also key to ensure that contractors know about the project and have capacity to tender.
Considering alternative materials, sustainability credits etc./ensuring value is maximised
It is essential in the current climate that value management is prioritised to maximise spend and ensure delivery of the best outcomes possible.
Alternative materials and sustainability credits should be reviewed to see if more cost/programme efficient options are available.
Utilising modern methods of construction (MMC) where appropriate
May help to reduce onsite labour demand and help with planning/quality.
Using digital tools and data
Data analytics, Artificial Intelligence and machine learning, digital twins and 3D printing can all help to improve efficiency and outcomes.
Promoting collaboration
All parts of the industry need to work together to overcome the challenges.
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