Our previous papers have all focused on increasing building costs and, unfortunately, this theme continues. In this paper, we are looking at both labour and material cost pressures faced by the UK construction market as a whole.
Labour shortages in the UK worsened in the final quarter of 2021, with job vacancies hitting a record high of 1.2 million, more than double their level a year before, the Office for National Statistics said. Construction job vacancies stood at 42,000, slightly down from the peak in Q3 of 48,000 but just over 60% higher than Q4 2019, before the impact of the pandemic and the UK’s exit from the European Union.
There is a shortage of labour, according to the Hays/BCIS Site Wage Cost Index and all-in site rates rose by 8% in 4th quarter 2021 compared with a year earlier.
All this was before the crisis in Ukraine emerged and there are no indications that the impacts of the war on building material prices will subside soon. The UK’s reliance on imports from the Ukraine and Russia appears low and only 1.5% of our imported construction materials come from here. However, there are some critical products such as over 13% of steel reinforcement and over 9% of asphalt products come from these countries.
Our European imports are more important – the BEIS report that 52% of all imported construction materials and components come from the EU. However, the European market is heavily reliant on imports from Russia and so supply from the EU has become increasingly difficult.
This is all compounded by the rise in inflation across all EU economies and 9 of the top 10 countries (China being the exception) the UK imports from, are European. All 9 of these countries are seeing estimated consumer price inflation rises well above their 10 year averages. Even including China’s low inflation rate, imports are still at risk of cost escalation due to the supply constraints and ongoing Covid lockdowns. Taking Turkey as an example, inflation is estimated to be 49 points higher than the 10-year average and this is where 47% of the UK’s imports of radiators and 36% of steel tube comes from. Even with exchange rates as they are, costs to the UK of these items will increase.
What can we do?
The construction industry is working hard to build the long term capacity of its labour force. There are incentives being offered to potential apprentices such as financial assistance with training, guarantees of roles on completion of training and more advertising of the benefits of working in construction. But this will take time to filter through and there is no immediate prospect of it having a positive effect.
The situation with materials is more volatile and there is no immediate sign of anything changing in terms of material availability or price. Shortages of certain materials will affect the price and this seems to change on a week by week basis. Timber, steel, glass, plaster and so on have all been the headline material as the factors described above kick in.
In the insurance claims world, the short term will see increased costs for building repairs, fuelled by both labour and material shortages. Understanding this can help us appreciate why we are seeing repair costs higher than we might normally expect and why lead in times for builders are longer than expected. This means that adjusters will need to consider the potential cost increases when reserving and we discussed the effect on the Value at Risk of buildings against the sum insured in our last paper.
We also previously discussed what we are likely to see: builders reluctant to provide a firm price because of material cost fluctuations, and difficulty in finding a builder to do the repairs. These are all challenges we will need to face, even where we are working with a schedule of rates.
One option is to minimise replacement and consider more repairs. Can we repair an element, such as a damaged UPVC window or bath, rather than replace, using techniques that are now available? When we are considering strip out, can we dry or clean more instead of striping out and replacing?
Delays due to builder availability could also affect alternative accommodation, loss of rent and business interruption claims adversely, so what can be done to accelerate repair start and completion dates? All these issues are worth thinking about and planning for now because this volatility around building repair costs is not going to settle down quickly.
As previously mentioned the forecast for 2022, and into 2023, is for costs to continue to rise due to fuel and power increases adding to the Covid and Brexit influences and the industry skills shortage. There is currently no sign that fuel prices will reduce in the immediate term, any more than the skills shortage, and while we start to return to ‘post Covid normality’ there will be ongoing issues with the supply of manufactured/processed materials due to the UKs reliance on Europe for materials and production cost increases.
We will continue to monitor developments and provide regular updates to this changing landscape.
For further information please contact Nick Turner on 07736 892148 or n.turner@woodgate-clark.co.uk
