Input Costs

MATERIAL COSTS

The latest ONS data shows that the ‘All Work’ construction material price index increased by 4.3% in the year to February 2019. There was a period of brief respite in the final four months of 2018 as the All Work index ground to a standstill but the pace of growth has picked up again in the first few months of 2019.

The materials experiencing the greatest price increases in the 12 months to February 2019 were, once again, imported sawn or planed wood (8.7%) and imported plywood (7.8%). However inflation for several key materials flat-lined in the final few months of 2018 which helped take the edge off the most recent annual inflation figures. Ready-mixed concrete is only up 0.4% in the year to February 2019 and concrete reinforcing bars (steel) actually fell by -1% over the same period.

Whilst the recovery of oil prices in the first few months of the year will put some upward pressure on material price inflation in 2019, we anticipate a slight easing compared to last year’s material price rises. Most commentators expect moderate inflationary growth throughout the rest of the year as foreign exchange induced inflation continues to push material costs higher, putting some pressure on tender prices.

LABOUR

Average weekly earnings (AWE) in the construction industry increased by 4.5% in the year to February 2019 to £623 per week – a growth rate that is comfortably ahead of general consumer price inflation. However, earnings peaked in December of last year at £644 and have since fallen by -3.3%.

Companies have been less inclined to award large pay increases as a result of the underlying political uncertainty. However if the Brexit negotiations do lead to a two-year transitional period, certain existing fundamentals (eg labour shortage, sustained high levels of construction output) will continue to put upward pressure on pay. In the shorter term we expect more volatile wage growth, impacted by swings in seasonal demand.

Our latest TPI results also show that since our Q4 2018 TPI survey, a higher proportion of respondents are expecting shortages of skilled labour to transpire over the next six months. With weakened sterling, more foreign construction workers are deciding to return to home economies, compounding the construction skills shortage.

PROFITABILITY AND SUPPLY CHAIN

Both OH&P and preliminaries are at historically high levels. G&T has seen little change in the past three to six months with OH&P remaining at an average of 5-6% and preliminaries around 15%.

Looking forward to the next six months, our survey found that whilst the majority of respondents expect OH&P to remain the same, there was a growing number that thought OH&P may actually fall from current levels as more competitive pricing is seen from main contractors over the elements that they can control.

Whilst we anticipate contractor margins to remain flat in 2019, a portion of the higher input costs may be partially and strategically absorbed by contractors looking to fill their order books and secure turnover. However, with profit margins in the sector already relatively low, it is unlikely contractors will opt to buy work at negative margins.

The slump in new orders in both 2017 and 2018 has left contractors chasing fewer projects. If recent downgrades to UK GDP forecasts for 2019 and 2020 are to be believed, we could see further declines in construction activity, creating a more competitive market and putting downward pressure on tender prices. However, it remains very difficult to predict how the evolving economic and political climate will impact demand, input costs and ultimately tender pricing.

Whilst Brexit uncertainty is still being cited as the reason not to progress many schemes, G&T has seen some backlog projects that were previously put on hold beginning to come back to life. Companies and developers working on larger projects, where higher volumes of labour and materials need careful resourcing so that capital costs are managed without dramatic impact, appear more nervous about entering into new contracts. However, smaller to medium sized low-risk projects are moving forward as business needs continue. The net effect is a reasonably steady workload and a healthy pipeline of business as usual. As a contrary view we may see a significant bounce in new orders once Brexit is clarified as pent up demand is released.