Government publishes National Infrastructure and Construction Pipeline 2021 policy paper

Construction

• Data from Glenigan shows the value of construction work awarded by clients fell by £1bn in August to £5.1bn – down from £6.1bn in July. Most work was awarded in the commercial sector (21% or £1.3bn of work), followed by the private housing sector (£929m). Additionally, the value of new projects approved in August fell by 16% compared to the previous month to £7bn. The private housing sector saw the highest value of projects given the green light (£2.52bn) but the industrial sector, helped by strong demand for additional warehousing and logistics facilities, achieved the second highest value of approvals (£2bn).
• The Government has published the National Infrastructure and Construction Pipeline 2021 policy paper – a forward-look at the pipeline of planned projects and programmes. The report provides information about future workforce demand based on planned investment and provides insights across into the infrastructure the UK plans to procure over the next year and beyond. According to the paper, up to £650bn will be spent over the next decade with the transport, justice and education sectors set to receive the highest estimated minimum contract values in the 2021/22 financial year. Encouragingly, the estimated maximum value of contract procurements in the pipeline to include delivery using some form of MMC in 2021/22 is £22.4bn – nearly 73% of the total contracts in procurement.

• A recent panel of leading cost consultants, which G&T formed a part of, agreed that June saw the highest cost escalation as construction inflation outpaced general inflation. The consensus across participating firms was that from mid-May to mid-August 2021, tender prices have experienced an unprecedented spike on the back of COVID-19 unwinding and global supply chain issues. The panel noted the following key points:

1. Labour availability has been affecting productivity and some suggested that labour could be a long-term cost driver, taking over from raw material price increasesBase raw material prices and transportation costs (which are expected to persist into 2022) have also moved up significantly
2. Contractors are suggesting that supply problems and shortages could last 12-18 months while shipping/container issues are sorted and new HGV drivers are trained
3. Appetite for fixing prices has dropped significantly and if prices are being fixed, contractors are tending to add significant premiums
4. Some steel subcontractors and timber suppliers are only holding prices for 24-48 hours
5. Some reported the supply chain was unwilling to commit to work more than six months down the line

• Data from the ONS showed construction output fell for a fourth consecutive month in July and was down by 5.1% compared to the same month in 2019, prior to the pandemic. The ONS suggested that the main reasons for the monthly decline were price increases and product shortages caused by supply chain problems. Both new work and repair & maintenance output fell in July 2021, the former being 6.9% below what it was the same month in 2019, while the latter was down 1.6%. The monthly contraction is thought to not have been related to market confidence but to shortages of key materials such as timber. Consequently, output growth has cooled in sectors that require a lot of timber such as the new housing and housing repair & maintenance sectors.

• In a further sign of the impact sustained cost inflation is having on major schemes, the Epsom and St Helier University Hospitals NHS Trust said in its Annual Public Meeting board papers there were growing concerns regarding rising labour and material costs and the impact it is having on tender prices. This has prompted some affordability concerns with regard to rebuilding the St Helier Hospital in Sutton with Rakesh Patel, the trust’s chief financial officer, saying that:

• The World Green Building Council (WorldGBC) has beefed up its requirements for property and construction firms that have committed to its 2030 net zero building challenge. The commitment already requires signatories to account for all operational carbon emissions within their direct control but the new commitment, which comes into effect from 2023, would require all businesses to:

1. Account for the whole lifecycle impact of all new buildings and major renovations by mandating they are built to be highly efficient, powered by renewables, with maximum reductions in embodied carbon and compensation of all residual upfront emissions
2. Track and report business activities that influence the indirect reduction of whole life carbon emissions

Client & Contractor News

• Galliford Try is planning for ongoing materials shortages by buying up stock a year in advance for certain materials such as bricks. While the firm is aware of the impact of the current material shortages, chief executive Bill Hocking said that it has had “no material impact on us so far”. He added, “I don’t think the shortages are getting any worse [ but] I think we’ve got another six months of it being like this.” Hocking was speaking as the firm unveiled a £11.4m pre-tax profit in the year to June 2021 from the near £60m loss it posted in its previous financial year. He added that while the impact of the COVID-19 pandemic was wearing off and that productivity was back to near normal level, the next few weeks would be the real test of whether labour shortages were a summer blip or more of a long-term issue.
• Amid a push for more last-mile delivery facilities, British Land has announced further details regarding its plans to turn Finsbury Square Car Park into a logistics hub and distribution point. The site, which was reportedly acquired for £20m, has the potential to extend underground, with electric vans, scooters and bikes arriving to pick up parcels for delivery around the City. Although last-mile logistics is a new area for British Land, the firm is considering more sites that could potentially be turned into logistics hubs in urban locations, particularly within the M25.
• Kier has turned a pre-tax profit for the first time in three years and has outlined plans to resume dividend payments in the next three to five years. In the year to June 2021, the firm managed to turn a £5.6m pre-tax profit (after a £225.3m loss one year ago), making good progress on its target to repair its balance sheet. Having completed its two-year restructuring programme, Kier noted its wider plans to grow adjusted profit margins to 3.5% and its annual turnover to between £4bn-£4.5bn. Kier’s return to profit on a statutory basis and having net cash in the balance sheet could mark the re-emergence of Kier as a frontline contractor looking to progress forwards, rather than being managed for survival or the benefit of the banks.
• Legal and General’s modular homes division – L&G Modular Homes – has posted a loss for the fifth consecutive year. With total losses standing at £137m since launch in 2016, the business has yet to show any revenue on its accounts. While unable to comment on the losses, L&G Modular has previously said that losses were to be expected given the investment needed to get modular housing up and running. Its parent company, Legal & General, is expected to provide ongoing financial support and in 2020 put a further £37m into the modular homes business – an 85% increase on the £20m provided in 2019. After a series of false starts, L&G Modular Homes has shown signs of ramping up activity in 2021, with work starting on its first two sites this financial year.

Materials & Commodities

• Copper prices continue to retreat further from their record high in May 2021 as supply and demand become more balanced. China has vowed to continue to release copper, aluminium and zinc from its state reserves in an effort to cool the rally and reduce prices to reasonable levels. Copper prices are still up by around 20% in 2021 (after rising 26% in 2020) and demand is expected to remain high as the world heads toward electrification and infrastructure is built to decarbonise energy supply.
• British Gypsum has issued a price increase notice outlining price rises effective from October 2021. Plasterboard prices are being raised by 6-7% and most fixings are set to increase by 3.9% – 7%. The most significant increases are for metal products, eg gypframe metal profiles and ceiling accessories such as CasoLine Quick-Lock Grid Tees, Wall Angles and Corridor Systems), all of which are seeing price increases of 22%. The October price rise is unusual as British Gypsum typically only increases prices in January of each year.
• Builders' merchant Jewson has warned that soaring demand and supply shortages for a range of materials is forcing it to put up some of its prices this month, such as a 10-15% increase for wheelbarrows, a 5-20% rise for sealants, adhesives and chemicals, a 12% increase for glass wool insulation and a 20% jump for MDF mouldings. Severe and sustained disruption linked to the pandemic and Brexit has brought about the deepest supply chain crisis in decades with Jewson reporting that supplies of cement, plasterboard and insulation are being rationed by manufacturers, forcing it to limit availability of some products using an “allocation process”. Other products will go up in price or will take longer to deliver.

UK Economy

• The Bank of England’s quarterly survey on attitudes to inflation has revealed that public concern over inflation rose sharply in August, with only a third of respondents saying the BoE was doing a good job of keeping prices under control – the lowest satisfaction score since 1999. There is increasing concern about the bank’s ability and willingness to control rising inflation, which jumped to 3.2% in August, and this public perception of inflation is likely to feed into market sentiment. This week’s Monetary Policy Committee meeting will be closely watched as the UK grapples with short-term price pressures but the BoE is forecasting the UK inflation rate will rise to around 4% at the turn of the year before moderating slightly in 2022.
• The UK Government is scrambling to respond to a surge in natural gas prices that could have wide-reaching effects, from driving up energy prices to threatening the production and supply of steel. Soaring natural gas prices have stoked a surge in electricity costs which is hitting heavy industry, prompting British Steel to report that the unprecedented rises are making it impossible to profitably produce at certain times of the day. While being driven by several factors the issue ultimately boils down to high demand for gas as the economy opened up as well as supply bottlenecks in certain countries such as Russia and Norway. This has increased wholesale prices by 250% since January 2021 – with a 70% rise in August, according to figures from Oil & Gas UK.

Global Economy

• The regional head of one of the largest haulage companies, XPO Logistics, has said that the European lorry driver crisis is expected to deepen in 2022 as wages rise and labour shortages worsen. Luis Gomez, president of Europe at XPO, expects shortages to cause disruption in the run up to Christmas and that new EU regulations will put further strains on retailers and producers next year. He noted the problem is particularly acute in the UK due to Brexit, the pandemic, tax reforms and backlogs for driving tests exacerbating the supply chain crisis. Creating further capacity constraints and transport cost inflation next year, new labour laws on commercial road transport (known as the “Mobility Package”) come into force in February, which Gomez said will push transport costs higher “for at least the next 18 months”.
• Economists have said that rising energy prices will push up inflation across Europe, threatening the region's post-pandemic recovery. Benchmark European gas prices have already tripled this year and economists are advising to brace for further surges. The eurozone’s consumer price index for energy has risen to its highest level since records began in 1996. In August, its 15.4% annual increase, the series’ biggest jump since the global financial crisis, pushed the eurozone’s headline inflation rate to a decade high of 3% - well above the ECB’s target of 2%. ECB officials and economists, however, have said they expect the rise to be temporary, because of one-off factors such as supply chain disruptions, as the developed world emerges from the pandemic.