Since our last update in July there are, unfortunately, more concerning headlines to consider
Just as it looked like the availability and cost of construction materials was coming under control and settling down, interest rates and power costs have entered the equation. Year-on-year prices for all building work rose by 27.2% from May 2021 to May 2022, according to the business department's monthly Building Materials and Components Statistics.
As we know, a combination of price inflation, energy price rises, and the Ukraine conflict have all impacted the construction sector this year. And now, inflation is rising at its fastest rate for 30 years as fuel, energy and food costs surge.
The Builders Merchants Federation (BMF) said in its June edition of Builder Merchants Building Index (BMBI) that demand for building materials remans high but stable but warned that price inflation is a critical issue.
The Construction Leadership Council (CLC) has said that the construction materials shortage is easing with product availability improving across most categories. This follows 18 months of material shortages and rising prices. They go on to say that the high levels of inflation on products, exacerbated by the Ukraine conflict, has stabilised:
"Softening demand, particularly at the retail end of the market, has led price inflation to moderate for some products, although this is unlikely to result in lower project costs in the short term.”
So, things were looking up…
However, transport problems continue to affect imports of some materials and a lack of capacity on shipping routes is likely to mean prices will remain high. Rising energy costs and interest rates and a scarcity of labour are also creating supply chain challenges.
The CLC says that inflation is likely to persist at a lower level across most product categories for the rest of the year but warns that inflation and the cost of living crisis are notably affecting some SME builders.
We discussed the potential for increased insolvencies for builders previously and this month, the Insolvency Service released figures that indicate that the construction sector is experiencing the highest rate of insolvencies since 2012. All Government support has now ended, with the temporary easing of insolvency rules ending in March this year.
Now, the consequences of this and the pressures builders have been under is beginning to show. The risk of insolvency is now threatening to overtake inflation as the main risk to construction of new buildings and building repairs.
In the year leading up to Q2 2022, almost 4,000 construction firms in the UK, became insolvent. To put todays situation into context, in 2012, the interest rates were 0.5% and today the rate is 1.75% and increasing.
Getting building work started has been difficult with the shortages of materials and labour but now, getting the work completed is an additional risk.
The industry has not faced inflation and insolvency risks on this scale at the same time before and there is a fear that, while tender prices may reduce, this will increase the risk of insolvency, particularly as inflation growth continues.
98% of construction firms are SMEs and it was these businesses that accrued the most debt during and after the pandemic. Outstanding loan payments have increased dramatically and as interest rates rise, the cost of the loans is increasing, making it ever harder to service the debts.
What this means for Insurers and Adjusters
For those managing networks, it is essential that they keep an open and collaborative dialogue and relationship with their suppliers. Identifying issues early and openly and taking a pragmatic approach is more likely to resolve insolvency challenges. There is clearly a difference between early and prompt payments to assist a supplier and paying up front when the true situation is not fully understood, so openness and clarity are essential.
In other situations, insurers and adjusters must appreciate that the lowest tender may not always be the one to accept. We should ask why it is so much lower than the others, understand the payment terms demanded, lead in times and project period. But essentially, what due diligence has been done? What tools do you have available to check a company’s risk rating and what other financial checks will you or the surveyor managing the tender process need to do?
Not only is it bad for a building company when it becomes insolvent but it is a disaster for the insured and, ultimately, it will add time and cost to complete the repairs.
Trying to get a builder to finish another builder’s work is always difficult but in today’s climate, there will be a huge premium to pay and the potential for delays. Where a claim involves Alternative Accommodation/Loss of Rent or involves any Business Interruption aspect, the impact can be even bigger.
With all this in mind, it may be worth paying a little bit more for a financially secure builder when considering the potential for what can happen if a builder fails during the repairs.
For further information please contact Nick Turner: 07736 892148 or n.turner@woodgate-clark.co.uk
