-1% to 1%
Fabricated Structural Steel
Concrete Reinforcing Bars (Steel)
Ready Mixed Concrete
Oil Prices (Brent Crude)
Construction Industry Average Weekly Earnings (Annual Growth to Jul 2020)
UK Manufacturing Output (Jul 19 - Jul 20)'
The closure of manufacturers and builders merchants in April made it difficult to obtain certain materials. Initially, this was accompanied by a corresponding drop in demand for construction material, but as restrictions were eased and work on site resumed suppliers struggled to meet the unleashed demand.
Against this backdrop, material prices spiked higher as the supply-side slowly ramped up production capacity and output. The difficulty in obtaining certain materials such as plasterboard, aggregates and bricks, MEP equipment and insulation led to longer lead times for some of these trade packages. Although the availability of materials has improved in recent months, according to the ONS’s Business Impact of COVID-19 Survey, between 24 August and 6 September 2020 nearly 21% of construction firms had to change suppliers or find alternative solutions to get the materials needed. Over 6% of the surveyed construction firms said they were still unable to get the materials they required. However, since June supply has generally caught up with demand and materials have became more readily available, pushing prices back down.
Despite the recent volatility, since December 2019 construction material prices have been on a general upward trend, with the ONS’ ‘All Work’ index showing a 2.4% rise over the period. However, with prices so volatile and a general expectation that prices will settle down as a result of lower demand, contractors are likely to view the recent rise as temporary and will therefore be unlikely to significantly alter bids.
Looking at specific key construction materials, fabricated structural steel prices recovered sharply between February and May 2020, partly fuelled by a Chinese construction boom pushing iron ore prices higher. However, since May steel prices have tapered off. In fact, most key construction material prices including rebar and ready-mixed cement have levelled off in the three months to August 2020, coinciding with the reopening of supplier and distribution channels.
If a trade deal with the EU begins to look unlikely, further stockpiling or bulk buying of key materials in the final quarter of the year may exacerbate the delicate supply and demand issues and put some upwards pressure on material prices.
With labour rates being 5.3% lower in July 2020 than the same month in 2019 and construction job vacancies down by 29% in the three months between June and August 2020 compared to the same period last year, we anticipate that labour will act to lower input cost inflation and tender prices in the short-term.
We are yet to see how the ending of the Job Retention Scheme will impact the sector. Construction was heavily reliant on the scheme after it was initially launched but in recent months the proportion of construction firms workforce that were on furlough leave dropped substantially. At peak usage of the scheme in April, surveyed construction firms were reporting that over 45% of their workforce were furloughed. Fast forward to early September and this number dropped to just 5.9% - well below the ‘All Industries’ average of 10.7%.
With an average of 5.9% of UK construction firm’s workforce on furlough or partial furlough leave, the potential risk for further job losses before the end of the year is significant. According to HMRC, as at 31 July 2020 around 277,000 construction employees remained furloughed. Some of these will be saved by the Chancellor’s wage subsidy programme which will top up income for those asked to work reduced hours, but some further job losses will be inevitable.
September’s UK construction PMI survey revealed that redundancies continue across the industry. It is, however, encouraging that that rate of job shedding has eased substantially. According to the survey, workforce contraction fell to its slowest rate in the last seven months. However, if new order growth continues to lag and an insufficient number of new projects come forward to replace completed ones, there could be further redundancies in 2021 as firms seek to restructure or downsize their operations. Ultimately, a larger pool of inactive labour, less new work and lower profit margins will all act to add downward pressure on labour input costs.
PROFITABILITY AND PROCUREMENT
Our latest TPI survey found that the majority of respondents (55%) believed that overhead and profit (OH&P) levels had remained more-or-less static in the three months to September 2020, whilst nearly 43% said that OH&P had increased. However, looking ahead to the next 12 months, this changes significantly. The vast majority (71%) anticipate that OH&P will decrease over the next year whilst the proportion of respondents anticipating that OH&P will remain the same fell to around 25%.
Discounting and commercial reductions have become more commonplace in the current tendering environment. Main contractor OH&P levels are expected to fall in order to secure turnover. Tier 1 Main Contractors working on larger schemes appear to be holding their pricing levels, but lower tier contractors are tightening their bidding and reducing OH&P to secure order books. Overall, we expect OH&P to fall from a pre-pandemic average of 5-6% to around 3-5% over the next year.
With regard to preliminaries, most respondents (65%) said that preliminary levels were largely unchanged in the previous three-month period. However, looking ahead to the next 12 months there was far less certainty. A slight majority (55%) anticipate that preliminaries will fall from their current average. However, a number of these respondents acknowledged that the current COVID-19 related working restrictions and distancing measures (which look set to stay in place into 2021) would push up direct costs (I.e. the cost of implementing SOP’s) and indirect costs (i.e. reduced productivity and increased programme times). Despite this, those respondents generally thought that contractors would absorb these increased direct and indirect preliminaries costs in order to win work. Around 35% thought that preliminaries would remain unchanged over the next year, with some stating that upward pressure from higher direct and indirect preliminaries costs would generally balance out against the counteracting downward pressure from a shrinking pipeline and a desire to secure turnover.
The extent to which higher preliminaries costs are absorbed by contractors will depend on how many new tendering opportunities there are. New order values hit a record low in Q2 2020, so unless we see a significant recovery in new work contractors will be forced to be more competitive with their direct costs. On balance, we anticipate that preliminaries will rise marginally over the next 12 months, averaging around 16%. However, project size will play a key role here. Tenders for larger projects with longer durations may see SOP’s and distancing restrictions relaxed as construction progresses. This is less likely to be the case for smaller projects.
Finally, our latest TPI survey revealed a notable shift in preferred procurement route. While the majority of respondents still said that design and build (D&B) was the most favoured procurement route over the past three months, single-stage tendering has become much more common. Just over 32% of respondents said that D&B single-stage was the most favoured route – on par with the proportion of respondents that said D&B two-stage was the most favoured route.
Clients perceive that the contractor is best placed to take on the risk and would prefer full visibility of costs at an early stage. Contractors appear to be increasingly willing to tender on a single-stage basis in this increasingly competitive tendering environment. This is particularly the case for smaller projects where there is much greater competition.