Input Costs

MATERIAL COSTS

The latest ONS data shows that construction material prices continue to creep upwards. The All Work indices show that material prices increased by 5.1% in the year to October 2018 – a slightly lower increase than in the same period a year earlier (5.8%).

The materials experiencing the greatest price increases in the 12 months to November 2018 were imported plywood (12.9%) and imported sawn or planed wood (11.5%), with the cost of fabricated structural steel also increasing 7.9% in the year to October 2018.

Upward inflationary pressure on imported materials has largely been the result of a weak pound. In the event of a no-deal Brexit the value of sterling could be pushed down even further. Equally, if a withdrawal agreement is reached, the pound could rally, alleviating some of the upward pressure on material price inflation.

There are reports of materials being stockpiled or prebought to mitigate some of the risk of a no-deal Brexit which would likely result in delivery delays and possible additional costs at the border.

The ability of contractors to absorb further increases in material costs is limited. A no-deal Brexit that would see the UK resorting to WTO rules would inevitably put further pressure on contractors to raise tender prices.

LABOUR

Average weekly earnings (AWE) in the construction industry have increased by 4.2% year-on-year since November 2017 to £627 per week. However, earnings growth eased towards the end of 2018 perhaps signalling that wages are approaching the limit of what companies are prepared to pay.

Wage growth continues to be driven by a shortage of skilled labour putting cost pressure on contractors. The Government has made it clear that EU nationals currently working in UK construction (approximately 7% of the UK construction workforce and 28% of the London construction workforce) will not be expelled, but unskilled EU labourers seeking to work in the UK are unlikely to be granted a visa under the UK’s new immigration strategy.

Our TPI survey results indicate a marginal skilled labour supply shortage for the next six months. With workload expectations in 2019 set to remain broadly unchanged from current levels it’s likely that upward pressure on AWE will remain.

PROFITABILITY AND SUPPLY CHAIN

We have seen a backlog of schemes with planning approval that are ready to be built, but with high construction prices and an anticipated downturn in the EU/ global economy, these are not progressing.

Any short-term reduction in projects moving forward will likely impact future workload from 2020 onwards, putting downward pressure on tender prices. However, with margins already stretched as a result of absorbing higher material and labour costs, contractors (especially tier 1) are unlikely to resort to aggressive tendering.

An analysis of G&T’S TPI market survey shows that 67% of respondents expect main contractor OH&P to remain flat over the next 12 months. With the heightened level of uncertainty it is difficult to see any inflation of OH&P on current levels.