Construction activity in June expands at fastest pace since June 1997

Construction

• G&T’s recently published MEP survey shows that while typical project overheads for MEP contractors have risen between October 2020 and June 2021, average project profits have dropped. According to surveyed contractors, typical overheads were reported to range between 7-12% in our June 2021 survey, with an average overhead figure of 8.5%. This was up from a range of 5-10% in our October 2020 survey and an average overhead figure of 7.9%. Meanwhile typical profit ranges widened between 2-8%, with an average profit of 3%. This compares with a range of 2.5-5% and an average of 3.7% in our October 2020 survey. Surveyed MEP contractors reported that many competitors are still buying work to secure turnover and, in order to remain competitive, are absorbing cost increases where possible and taking a hit on margins.

• The CLC has published its Construction Zero Performance Framework, revealing its targets for the industry to work towards net zero carbon. The performance framework, developed in consultation with industry, includes ten 10 headline commitments it wants construction to meet in the coming years. Headlines include ‘becoming world leaders in designing out carbon’ and ‘accelerating the shift of the construction workforce to zero emission vehicles and onsite plant’. Under each headline are various metrics the CLC will use to report net zero progress to the Government, provide evidence of where Government intervention is needed and to keep the industry informed. Data will be gathered on a quarterly basis and published as an industry carbon dashboard, with the first update due to take place in October ahead of the COP26 conference.

• New ONS data shows that construction vacancies stood at 33,000 in the period between April and June 2021 – the second highest number of vacancies in 20 years but a 5.7% drop from the 35,000 vacancies seen in the previous three-month period (Mar-Apr 2021). Despite nearly 140,000 construction workers being on furlough at the end of May, vacancy levels remain elevated. However, it’s unclear just how many of the 140,000 furloughed workers are actually skilled site labour. It’s possible that the majority of furloughed employments are in administrative or support roles. Regardless, fierce competition for skilled labour resource has helped earnings in the sector recover strongly. In May 2021, average weekly earnings were 1.3% higher than they were in February 2020, the month before the pandemic hit the UK.

• RIBA’s latest Future Trends survey report shows that optimism among architectural firms about future workloads remains strong. Actual workloads in June’s survey were 11% higher than they were a year ago but difficulties in sourcing construction products are causing on-site construction delays for 63% of practices. In addition, 25% of respondents reported that site work was being put on hold. Interestingly, delays are not just restricted to the construction stages as 18% of practices reported delays in design process. Reported challenges to the architects’ market included:

1. Labour shortages
2. Difficulty obtaining affordable Professional Indemnity Insurance with the right level of cover
3. The speed of the planning application process causing project delays
4. Shortages of construction products disrupting project delivery and creating project cost inflation
5. The potential effects of the gathering third wave and the planned lifting of COVID-19 restrictions

Nevertheless, June’s survey saw many practices report increasing enquiries and strong optimism about future workloads. 38% of practices expect workloads to grow in the coming three months, whilst over half (54%) expect them to remain the same.

• Construction activity in June expanded at the fastest pace since June 1997 according to the latest PMI data, largely thanks to a sharp rise in new orders. The index rose to 66.3 with sharp increases in business activity seen across all three main areas of the construction sector. In addition, total new orders increased for a 13th consecutive month, albeit the expansion was slower than May’s survey record high. Severe shortages of construction products and materials resulted in a record rise in purchasing prices in June and suppliers' delivery times lengthened by the greatest extent since the survey began. Tim Moore, Economics Director at IHS Markit, said:

• According to Glenigan’s Construction Industry Forecast (2021-2023), the value of underlying starts (in this case, projects with a construction value of less than £100 million) in the UK construction industry is expected to return to pre-COVID levels by 2022. Underlying starts are expected to total £54.2 billion in 2022 - 3% above 2019 levels. However, Glenigan notes the recovery will not be evenly spread with the private housing and retail sectors expected to see the highest growth rates this year but the hotel & leisure and community & amenity sectors forecast to see the strongest growth in 2022 and beyond.

Client & Contractor News

• The CLC and a number of contractors have asked the Government for self-isolation rules to be relaxed. The so-called “pingdemic” is causing plants, sites and offices to wind down activities as staff absences put pressure on the sector, risking project delivery and the viability of some firms. John Morgan, chief executive of Morgan Sindall, said that, “It’s manageable but it is a real issue”. He added that with the self-isolation rules set to change in three weeks’ time he said “a big chunk of it will go away. I’m not losing any sleep over it.” His comments come as the contractor prepares to unveil record-breaking interim results this week. Morgan said a record order book of £581m at its fit-out business showed that the office still had a future, explaining that:

• A new £30bn mega construction framework through which new major public construction projects will be procured will focus on reducing carbon emissions during construction. In line with the Construction Playbook and the Government’s modern methods of construction agenda, it is hoped the framework (called “P23”) will bring the latest best practice in construction methods to the NHS ProCure 23 framework, MoD airfield works and major construction projects valued at more than £80m. ProCure23 will be a key element of the framework, accounting for over £17bn of spend over four years to 2025. Work will include the provision of design and construction services to NHS capital projects other than the recently-launched New Hospital Programme. The four-year, three-part framework for the Crown Commercial Service will help deliver greener facilities, reduce carbon emissions and promote social value.

• John Sisk has reported its pre-tax profits dropped 44% in 2020 to £2.8m on a turnover that was also down by 7% (to £390m). However, in its latest filed accounts the firm said that its cash balances nearly doubled in 2020 (from £32m to over £62m) and that is has a strong order book for 2021 and a “good line of sight” on work for 2022. It said that while it has modelled budget drops of 10-30% for 2021, Sisk concluded there was:

• Balfour Beatty has been awarded a contract through the Crown Commercial Services framework to convert 225,000 sq ft of warehouse space into the UK’s biggest COVID-19 testing lab. The new Rosalind Franklin Lab in Royal Leamington Spa will adopt a modular approach to construction so that the lab can begin operating while construction continues. As sections are added, testing capacity will be ramped up. On completion later this year, it should add hundreds of thousands of tests to the UK’s daily COVID-19 testing capacity. Works include the construction of a series of laboratory lines within the facility as well as the associated welfare and waste management facilities. Balfour Beatty Kilpatrick is providing mechanical and electrical works.

• Architectural practice Allford Hall Monaghan Morris has been given a green light to redevelop the site of the former Royal National Throat, Nose and Ear Hospital in King’s Cross into a major mixed-use scheme. The proposals include 14,000 sq ft of office space, a 182-room hotel and 72 homes (half of which will be affordable) across five blocks up to 15 storeys in height. A restaurant, cafe, gym and new public space will also be built as part of the proposals for developer Groveworld. All buildings on the hospital site will be demolished to make way for the development except the main building fronting onto 330 Gray’s Inn Road, which will have a two-storey roof extension added. Construction is scheduled to begin in early 2022 if the scheme is given the final sign off by the GLA.

Materials & Commodities

• The CPA has said that materials and labour shortages are now “key constraints” to forecasted growth. Despite the constraints, according to the CPA’s latest forecast a 13.7% rise in construction output is still predicted in 2021. This will be followed by a 6.2% rise in 2022, with infrastructure and private housebuilding expected to be the key drivers of growth. Material price inflation and skilled labour shortages are likely to persist for the next 12 months according to the CPA and are unlikely to improve significantly in the next six months. Noble Francis, CPA economics director, said the sharp recovery in construction has led to sharp cost increases and extended lead times for some key products. He added that this was particularly concerning for SMEs:

• A joint statement from the Builders Merchants Federation (BMF) and the CPA said that materials used in the housing repair, maintenance and improvement (RMI) sector are among the worst affected by the current materials shortage issues. These include bagged cement, roofing products, insulation, landscaping products, blocks, sealants, kitchen carcassing and products that use plastic such as drainage pipes have been affected by “unprecedented demand”. The CLC also added that while major housebuilders are managing sites to completion, smaller regional firms may need to wait for certainty around product availability before starting jobs. The statement also noted that timber supplies are expected to tighten from European saw mills during the summer maintenance period, but explained that global demand is beginning to ease and there are signs that availability may improve in the autumn.

UK Economy

• Buoyed by the vaccine rollout and a bounce back in consumer spending, the EY Item Club now expects that GDP will grow by 7.6% this year – the fastest growth in national output since 1941. According to the economic forecaster, the economy could recover its pre-pandemic size by the end of this year. However, its upgraded forecast comes with a health warning, noting that because the economy is so dependent on consumer spending on services, any further pandemic-related restrictions could have an impact on whether its forecast is achieved. Martin Beck, the EY Item Club’s senior economic adviser said lockdowns have a greater economic impact on the UK economy than in other countries and that the reopening of “face-to-face parts of the economy means the UK should have a correspondingly faster recovery”.

• Outgoing Bank of England policymaker Gertjan Vileghe has said that “freedom day” has so far only had a modest impact on consumer activity and that the BoE should be cautious about raising interest rates to counter higher levels of inflation that have emerged. He explained that although the economy is growing rapidly, there is a continuing sense of consumer caution. He pointed to the fact that footfall in retail hotspots rose just 1.7% on average in the five days following the 19^th July and that the BoE should ignore the temporary rise in inflation and keep the current monetary stimulus in place “for several quarters at least, and probably longer”. The spike in inflation is being “driven by supply bottlenecks and base effects, both of which are set to wane next year,” he said.

Global Economy

• IHS Markit’s eurozone flash composite purchasing managers’ index rose to 60.6 in July, up from 59.5 in June, bolstering economists’ hopes of a rapid rebound this summer despite the spread of the Delta coronavirus variant. The flash index reading was the highest since July 2020. By contrast, businesses in the US and UK reported slowdowns to their recent rapid pace of expansion due to supply constraints rising infections, subdued customer demand and widespread labour shortages. Along with inflationary pressures, these are proving to be a source of uncertainty among businesses. Businesses in all countries and regions though are concerned about renewed virus-related headwinds and their ability up keep up with rising demand.

• The IMF has upgraded its growth projections for advanced economies but has warned that developing economies’ limited access to COVID-19 vaccines could hinder the global economic recovery from the pandemic. While the find expects overall global growth of 6% this year, the IMF cut 0.4 percentage points off its growth forecast for emerging and developing economies this year, to 6.3%. By contrast, the IMF increased its forecast for advanced economies’ output growth this year by 0.5 percentage points to 5.6%, with notable upgrades for the US, UK, Canada and Italy. According to the IMF “Vaccine access has emerged as the principal faultline along which the global recovery splits into two blocs”. Some countries “can look forward to further normalisation of activity later this year” but many others “still face resurgent infections and rising COVID death tolls”.