Q3 2018

Input Costs

Overview Input Costs Macro Economics Tender Price Trend Tender Price Change

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Despite higher levels of construction output in Q2 2018, we saw increased material and labour costs.

The ONS construction material price indices (All Work) show that year-on-year (August 2017 to August 2018), material prices increased by 5.6%. The materials experiencing the greatest price increases in the 12 months to August 2019 were imported plywood (24.1%) and concrete reinforcing bars (13.6%).

Steel also contributed heavily to the inflation of material prices, rising 8.9% since August 2017. Oil prices have also been pushed higher and are now trading at a four year high (US$84.6 bbl as at 2nd October 2018). These inflationary pressures will begin to feed in to tenders.

The majority of construction materials come from Europe. Whilst some materials are manufactured in the UK, currently there is not sufficient capacity to support the size of the UK construction industry.

At the moment, the risk of a disorderly Brexit is fourfold:

  1. Possible delays in getting materials into the country through borders
  2. The risk to cost if sterling drops as a result of a ‘no deal’ Brexit (i.e. the cost of materials increase)
  3. Albeit perhaps not an immediate risk, there may be issues if EU accredited materials do not suit our legislation and standards, or vice versa
  4. The risk of seeing a shortage in skilled construction labour could push up wages, adding pressure to construction costs

LABOUR RATES

Average weekly earnings (AWE) in the construction industry have increased by 3% year-on-year since July 2017 to £613 per week. AWE in the construction industry broadly moved in a similar pattern with AWE in the manufacturing sector. However, despite being level with AWE in the manufacturing sector at the beginning of 2017, AWE in the construction industry experienced a greater rise throughout the year. As a result of the overall increase in 2017, construction finished the year as the second-highest earning sector in the UK.

The growth in wages has been brought about by an acute shortage of skilled labour. Wages for in-demand trades like joinery have increased by as much as 20% in a single year. Clearly, this scale of cost pressure on contractors cannot be sustained without endangering profitability.

With a significant proportion of construction workers in the UK coming from EU nations, there remains a real risk that the skills crisis could be exacerbated after Brexit. Recent reports indicate that the Government intends to continue welcoming skilled workers into the UK, but it is unclear whether this would include construction workers of all skill levels. If not, this could add to cost pressure.

Operational challenges also remain, including wage inflation, skills retention and a tight labour market. Our survey indicates a higher than average demand for skilled labour for the next six months. With new order books strengthening, workloads are likely to continue on their upward trajectory, leading to robust job creation.

UNEMPLOYMENT

The UK unemployment rate fell to 4% in June – down from 4.2% at the beginning of the year, the lowest level since April 1975.

ONS data shows that employment in the construction industry experienced a steady increase since 2014, which continued in 2017, with construction employment increasing by 3.8% compared with 2016. Construction employment at the end of 2017 equated to approximately 1.32 million (860,000 of which were self-employed).

Construction-specific employment is concentrated around London (14%), the South East (15%) and the North West of England (12%), with employment levels remaining relatively lower in Wales (4%) and the North East (3%).

The East and South West of England saw the most notable increases for construction-specific employment in 2017, growing 7.6% and 7.3% respectively when compared with 2016. In contrast, only Yorkshire and the Humber experienced negative growth, with construction-specific employment falling 3.9% in 2017.

PROFITABILITY AND SUPPLY CHAIN

Our analysis of tenders and market survey show that in the past three to six months, we have seen very little movement in overheads and profits (OH&P) and main contractor preliminaries. Going forwards, our survey results indicate that market conditions over the course of the next six months will experience intermediate levels of activity. We expect contractors’ workload in the same period to see a slight decline as some projects are put on hold while final Brexit talks take place.