With so many factors affecting building costs at this time, I thought we should look at some specific building items, particularly materials involving a high degree of manufacture.
There are, of course, many inflationary pressures affecting the construction industry but I want to focus on the effect of just a few of these, namely:
• Energy costs
• Shipping costs
• The effect of inflation on labour costs
Energy
Although the UK doesn’t use much gas from Russia, gas availability in Europe (particularly Poland, Hungary and Germany) is potentially expected to be restricted to high industry users to protect consumers, as Russia cuts off gas supply to the west.
This will affect materials that are manufactured in Europe and imported into the UK, which is around 60% of all construction materials.
Wholesale gas prices have increased from 48.29 p/therm in February 2021 to 592.56 p/therm in August 2022
The cost of electricity is having a similar effect on manufacturing costs, wholesale electricity prices increasing from 53.08 p/therm in Feb 2021 to 511.20 p/therm in August 2022.
Shipping costs
With the majority of construction materials being imported to the UK (60% from Europe and 20% from China), shipping costs have a huge effect on material costs.
The IMF report that shipping costs, which dramatically increased during the pandemic, continue to remain high and due to the world economic situation and the war in Ukraine, are forecast to continue to build past the end of 2022.
Even transport costs within the UK have risen dramatically due to rises in fuel costs. Logistics UK have reported an escalation in the cost of transporting goods during 2022 compared to the same period a year ago amid sharp increases in the cost of fuel and other global supply
chain pressures. Overall costs had increased by 25% or more and bulk diesel prices, which is about 30% of the cost to operate a vehicle, have risen by almost 50%.
The same cost increases are feeding through to freight rates, the price charged to move goods, particularly cargo transported by air and by road to outside the UK. It is reported that both air and international road freight rates have increased substantially.
Labour costs
Widely documented in the press and with some forecasts predicting 18% inflation by this time next year, some UK manufacturers are bracing themselves for a potentially significant increase in wage costs in the first half of next year.
There is also a similarly well documented shortage of skilled workers, not restricted to trades but including surveyors, engineers, site managers and other professions. As employers have to pay more to attract the skills they need, costs will need to be passed on to clients.
All industry commentators are saying that 2023 is likely to also see significant inflationary pressure on the labour market, as the cost of living crisis begins to put pressure on households.
One example of the impact of all of this is the glazing industry…
We have noticed that glazing costs, particularly in commercial buildings where some high-tech products are used, have been increasing a lot more than other construction sectors. Clayton glass is one of the UK’s largest, oldest and most innovative independent glass producers and in a communication to their customer base have said that they estimate that the cost of their combined energy usage could potentially rise up to eight-fold.
Gas availability in Europe as described above will ultimately drive the price of glass higher, and in turn will divert UK glass to be shipped to Europe where prices are likely to be even higher. When we consider that around 20% of the cost of glass is gas used in the manufacturing process, this will affect the cost to contractors significantly.
Clayton have also pointed out that two Russian glass plants have now been sold by Guardian (one of the largest glass producers in the world) as a result of the Ukraine conflict. This has reduced the supply previously going into eastern Europe.
Shipping costs remain high and manufacturers are looking to source alternative quotes from the far east and middle east. However, the cost of container shipping continues to prohibit this from being a viable alternative and UK manufacturers continue to take advantage of this.
Combined with the increased cost of all transport, the result is that the cost of delivering glazing to UK construction sites will continue to increase.
All glazing manufactures are anticipating significant increases in wage costs next year and have the same challenges to retain and attract staff as any other business.
The Energy Surcharge on raw glass was introduced in late 2021 and it now reflects a premium on raw glass of around 25-30% additional cost. Glass manufacturers have kept the energy surcharge at a minimum, but some in the industry are finding it necessary to raise these even higher. There is a worldwide shortage of PVB interlayer used in laminate glass, which has already significantly increased the cost of this glass. Coupled with changes in legislation in June (Building Regulations - Document Q), increasing the need for laminate, and with no additional supply available, the cost of this product will rise significantly, with further increases expected in 2023.
While some of these pressures are specific to the glazing industry, the majority apply to all manufactured materials imported or made in the UK. Other manufacturers will have their own sector specific challenges, particularly following Brexit and worldwide raw material shortages.
Other products
It is worth summarising some of the increases that have been recorded for other construction materials. All these are either manufactured or transported to the UK or both.
Plasterboard – in July 2022, this material increased by around 25% and is set for further increases into 2023.
UPVC products have increased by 20% in 2022.
Timber products (90% of which are imported to the UK) have increased between 15% and 20% in 2022.
Plumbing and drainage products have increased between 20% and 30%.
Clay drainage products have increased by 50%
Steel products have increased by up to 22% in 2022.
Bricks and blocks have increased between 15% and 20%
Concrete products such as kerbs have increased up to 25%
What can we do?
The most important point is that we need to be aware of what is happening. We all see the news where energy costs, inflation, interest rate rises, etc. are discussed at length and we can see how this translates into the cost of building repairs when we deal with claims.
By being aware, we can plan for higher building repair costs in our reserving as adjusters and ultimately, in underwriting by insurers.
Most schedules of rates will be adjusted as the industry indices are understood and applied but these schedules are mainly used for household or residential situations and not true commercial buildings.
Taking glazing as an example again, we are likely to see estimates for glazing rather than quotes and a reluctance for builders to provide any guarantee that glazing costs will not increase between submission of their price and the work starting. Where glazing is a significant part of a claim, we need to reserve appropriately and be able to explain our calculations to insurers.
We must also be aware of situations where the less scrupulous may try and take advantage of this cost uncertainty and add costs purely for additional gain. In most situations, a competitive tender will deal with this but our experienced surveyors and specialist adjusters are able to identify such practices.
For more information, contact Nick Turner
