11Th June 2020 Construction Update 780 Px Web Banner
Topics: UK Construction

New orders and output rise again in May's construction PMI survey

Construction

  • New construction orders increased at the fastest rate since the survey began in April 1997 according to May’s IHS Markit/CIPS UK construction PMI. The total activity index rose to 64.2 in May (from 61.6 in April), indicating that the construction sector remains on a strong recovery path.
2106 Construction Update Graphs New Construction Orders

According to the latest survey:

  1. Output growth accelerated at its strongest rate since September 2014
  2. A rapid upturn in new business meant that new order volumes increased at the fastest rate in over 24 years
  3. Nearly 47% of the survey panel reported higher volumes of new work – only 11% signalled a reduction
  4. Supply chains remain stretched and continue to struggle to keep pace with the rebound in demand
  5. Input cost inflation hit a survey record-high as demand for materials surged, increasing average cost burdens
  6. Housebuilding was the best-performing category of construction activity, followed by commercial work, which grew at the steepest rate since August 2007
  7. Civil engineering activity also increased sharply, although the pace of expansion eased slightly compared to the previous month
  • In a recently published procurement policy note the Cabinet Office indicated that contractors bidding for public projects will need to reveal their current carbon footprint and set out annual carbon reduction plans. From the end of September, contractors vying for public projects (worth more than £5m a year) will need to commit to becoming net zero by 2050 to be considered. Firms will also be required to project how their strategies will reduce emissions over the next five years and report their Scope 3 emissions (ie indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions), including transport, distribution and waste. The plans form part of the Government’s drive to make the construction industry greener in line with its goal for a net zero carbon economy by 2050.
  • New HMRC data has revealed that construction firms claimed £1.18bn under the Job Retention Scheme (JRS) over the six months to April 2021 – a steep fall from the £3.7bn claimed during the first wave of the pandemic in the six months to September 2020. While still a substantial sum, the statistics compare favourably with other heavily impacted sectors such as retail and hospitality (which claimed £3.7bn in the six months to April 2021). Provisional figures revealed that 30% of construction companies (or 72,800 firms) were still using the scheme on 30th April. This translates to 166,600 workers, or 13%, of the overall sector’s workforce.
  • The CITB’s Construction Skills Network (CSN) forecasts that construction will need to recruit an additional 217,000 new workers by 2025 just to meet anticipated demand. This effectively means that the industry’s annual average recruitment requirement is 4.4% a year between now and 2025 – significantly greater than the current annual growth rate prediction of just 1% over the same period. The most in-demand trades are expected to be joinery, fit-out and electrical but other construction professionals, technical staff and construction managers will also be highly sought after. Demand for new workers is being driven by planned infrastructure projects as part of the Government’s levelling-up agenda, as well as demand for workers to build the thousands of private new homes. The CITB report also predicts more demand to come from repair, maintenance and improvement work, as retrofitting existing buildings to meet net zero emissions targets becomes more important.
  • The Government has confirmed a new recognition system that will acknowledge architecture qualifications from around the world will be implemented as part of the Professional Qualifications Bill. Amendments to the Architects Act will see the Architects Registration Board (ARB) receive several new powers (eg powers to monitor the way architects manage their continuing professional development) and will allow the ARB to decide which international qualifications will be recognised in order to join its UK register. The mechanism is something that RIBA has been lobbying for on behalf of its members since the Brexit referendum. However, RIBA president Alan Jones said:

“To enable the UK profession to maintain and build its reputation as a global leader, the government must now focus on securing reciprocal agreements, to allow both the exportation and recruitment of talent.”

  • The Civil Engineering Contractors Association’s (CECA) quarterly workload trends survey shows that optimism in Scotland’s civil engineering sector has hit a six-year high. A quarter of Scottish firms reported a rise in workloads over the past year and 47% of contractors expect this trend to continue over the next 12 months. Employment outlook was also positive, with about half of Scottish firms expecting to recruit more operatives and staff over the next year. However, while Scotland’s construction industry is now operating at pre-pandemic levels of output, CECA Scotland’s chief executive Grahame Barn warned that shortages of key building materials (driven by rising demand) could limit the extent of the recovery if cost pressures continue to hit contractors.

Client & Contractor News

  • Plans submitted by Legal & General to turn a former Debenhams store on Edinburgh’s Princes Street into a hospitality hub and boutique hotel have been approved by the city council. Nearly 108,000 sq ft became vacant after the retailer collapsed last year. The £50m scheme will see three separate listed buildings (109 to 112 Princes Street) sensitively repurposed into a 207-room hotel, publicly accessible restaurant, lounge, spa and rooftop bar that will look directly on to Princes Street Gardens and Edinburgh Castle. Proposals also include a new pedestrian link between Princes Street and Rose Street as well as new shopping, dining, hospitality, leisure and public event space. Construction is expected to begin next year and L&G is targeting a BREEAM 'Excellent' certification and a carbon reduction 'Gold' standard. G&T is providing Project Management, Cost Management and Principal Designer & CDM Consultancy services.
  • McLaren is forecasting a turnover of around £600m for its current financial year (ending 31st July 2021) with profit back up to pre-COVID levels. After weathering a £13.1m pre-tax loss for the year ending 31st July 2020, Chairman Kevin Taylor said that the contractor is now in a good position after the challenges faced last year. The firm expects that public sector work (including work with housing associations) will contribute around 20% of McLaren’s revenues for its current financial year (up from 15% last year). McLaren’s major projects division has also started looking at work outside of London. Taylor said:

“In terms of the overall market. We're as busy as we've ever been in tendering at the moment.”

  • Contractors have been put on notice for a £3.5bn Ministry of Justice framework for projects worth up to £30m. Formed of multiple lots broken down by region and project value, the deal has a potential future spend of up to £2.5bn over a five-year period, with the possibility of £1bn additional spend should the framework be extended for another two years. A supplier event will take place on 15th June where the MoJ will share information relating to the business requirements, the framework structure and the procurement strategy. Upgrades to the prison estate have long been discussed and the new framework will enable the MoJ deliver on its 2019 promise to deliver 10,000 additional prison places.
  • The Court of Appeal has upheld a decision by Southwark council to grant planning for Allies and Morrison’s design for the redevelopment of the Elephant & Castle town centre. A campaign to oppose plans put forward by development managers Delancey to redevelop the 1960s shopping centre and London College of Communications sites was launched by campaigners wanting more homes for social rent and better terms for traders displaced by the scheme. Original plans submitted in 2016 were deferred by the council at committee in January 2018 because they only included 33 social rent equivalent homes. The proposals were then revised to include 116 social rented homes, which was subsequently approved. The consented proposals include 979 build-to-rent homes, with 330 of these classed as “affordable”, with the social rent element among that. A minor material amendment to the application was submitted earlier this year and is expected to be determined this summer. G&T is providing Project Management, Cost Management, Employer’s Agent and Principal Designer & CDM Consultancy services on the scheme.
  • Rick Willmott, chief executive of Willmott Dixon, has warned that the medium-term impact of COVID-19 has resulted in spiralling demand and restricted global supply. This has created a number of immediate pressures on the sector, including:
  1. Rampant cost inflation in a generally fixed price environment that will quickly erode supply chain margin
  2. Unavailability of materials which will delay project completions
  3. Capital projects may no longer be financially viable leading to a hiatus in contract awards
  • Willmott also noted that the firm’s own margin more than halved in 2020 with its pre-tax profit margin trimmed from 2.5% to just 1% in the year to 31st December 2020. He added that the wider industry will need to monitor these issues carefully, warning that rising inflation and materials shortages could result in some clients having to think again about their projects.

Materials & Commodities

  • Cement suppliers Cemex and Breedon have reportedly begun rationing supplies of products such as bagged cement due to spiralling post-lockdown demand fuelled by economies coming out of lockdown. Although unconfirmed, it is believed that Cemex has temporarily stopped taking on new customers and all available supplies are being restricted to existing customers under an allocation system. Retailers and building merchants have struggled to replenish stocks and many builders have resorted to going straight to suppliers instead. The situation has prompted calls from the CLC to ration certain materials to ensure that smaller firms can get their share. Breedon, which is still taking on new customers, admitted:

“The cement industry is experiencing strong levels of demand. We are managing our supply accordingly and working hard to support the needs of our customers.”

  • The Civil Engineering Contractors Association’s (CECA) latest workloads trends survey (for Q1 2021) found that a strong boom in infrastructure workloads is being threatened by materials shortages. More than 80% of firms said that costs had increased compared to 12 months ago and nearly one-third said there were problems with sourcing products and materials. With increased demand and a healthy pipeline of work in key construction sectors, CECA anticipates that supply and demand imbalances are likely to continue, resulting in materials shortages. CECA chief executive Alasdair Reisner added:

“That [is] why we are calling on the UK government and all industry stakeholders to continue to work together to ensure the construction-led recovery is not held back by an insufficient supply of materials, and to carefully monitor and meet the ongoing needs of the sector as we build back better from the coronavirus pandemic.”

  • Construction material price data published by the Department for Business, Energy & Industrial Strategy (BEIS) revealed a sharp increase in fabricated structural steel prices in April. According to the latest price indices structural steel prices experienced double-digit inflation, rising by 13.5% in April (month-on-month) and in the last year the price index has increased by nearly 32%. Rebar has also seen similar price rises as supply struggles to meet excess demand. Two further price hikes by British Steel in May are likely to push the index higher in the short-term but iron ore prices have recently began to fall after China signalled that it would focus efforts on cooling soaring prices of the steelmaking ingredient.
2106 Construction Update Graphs Beis

UK Economy

  • The KPMG and Recruitment & Employment Confederation permanent placement index (a widely watched survey that tracks the pace of hiring permanent staff) rose to 67.4 in May – well over the 50 mark ‘no change’ mark and indicating the majority of businesses reported an expansion in hiring activity. The survey flagged warning signs of labour shortages in some sectors, with the job vacancies index accelerating at its fastest rate since 1998 and staff availability falling at its fastest pace for four years. Demand for permanent workers climbed across all categories but labour shortages could potentially slowdown the economic recovery.
  • An annual EY survey ranked Edinburgh as the UK’s top city outside of London for foreign direct investment (FDI) on 2020. The professional services company reported there were 107 FDI projects in Scotland in 2020 – up 6% from the previous year. This contrasted sharply with declines of 12% for the UK as a whole and 13% across Europe. Edinburgh had 36 FDI projects while Glasgow had 23, giving it an overall ranking of fifth in the UK. The leading sectors for FDI in Scotland were digital technology with 19 projects, agri-food with 14 and business services with 11. Scottish Enterprise, the national economic development agency, said global companies were attracted to Scotland by the quality of the country’s workforce as well as a “competitive cost base, world-class universities and supportive business environment”.

Global Economy

  • China’s producer price index (PPI) - the price of goods leaving China’s factories – rose at its fastest pace since the 2007-08 financial crisis in May. China’s PPI index added 9% in May according to data from the National Bureau of Statistics. Driven by an international rally in commodities and raw materials markets (as well as a low base effect after being in negative territory for most of last year) the index has risen sharply in recent months, increasing costs for businesses and exporters at a time of mounting concerns over higher inflationary pressures globally. Given China’s significant share in global trade, PPI growth is likely to fuel global inflation pressure through higher prices for Chinese exports.
  • The World Bank has said that the global economy is set for the fastest recovery from a recession for more than 80 years. In its half-yearly outlook report the institution said the world economy is forecast to grow 5.6% this year - a sharp upgrade from previous estimates it made in January for growth of 4.1%. However, the recovery will be led by growth of a few major economies where rapid progress with the COVID-19 vaccine has enabled a faster return to relative normality. Developing nations are expected to struggle for longer, worsening divisions between rich and poor nations.