Simon Poulter is head of procurement and supply chain at Sir Robert McAlpine
Be it warnings from industry bodies of further bumps in the road or concerns over the ability of contracts to deal with the present climate, inflation is now a regular visitor to the pages of Construction News. While there is no instant fix, recent experience suggests collaboration should help to mitigate risk and some of the sharper effects of inflation over both the short and long term.
Ukraine is high among the causes of the current pressures, and although the conflict has had a strong effect on the construction market, the roots of the present challenges stretch back further.
First, there is the issue of rising demand. Work that slowed during the pandemic has now roared back into life. And major, ongoing infrastructure projects have provided a vital economic boost, alongside the consumption of materials from across the country.
The supply of materials has fallen while demand has increased. Thanks to the disruptive cocktail of Brexit, COVID-19 and the conflict in Ukraine, the supply of every major material has been reduced significantly. Timber and sheet materials, for example, are predicted to see price increases in some lines over the next year. When it comes to steel, the recently minted trade agreement between the US and the EU has resulted in a significant tonnage of it being shipped overseas. This is the perfect, inflationary storm through which the construction sector is fated to sail.
It is possible to chart a course through the choppy economic waters by working together to mitigate the risks posed by inflation. Although responses will vary, depending on whether a project is at the pre-commencement phase or under way, at the heart of the sector’s approach should be strategic relationship management, founded on a willingness to collaborate and accommodate.
Ultimately, our industry must recognise that project delivery is impossible without a solvent supply chain. In the case of pre-commenced projects, inflationary pressures can be alleviated by collaborating openly with clients and the supply chain as early as possible, adjusting the scope and design where needed to help projects remain affordable. As with ongoing projects, this is the opportunity to swap materials for products that are in more abundant supply or to import from different suppliers and countries. As work gets under way, sharing intelligence as soon as possible with every supply-chain partner becomes essential.
“Some contractors have broader shoulders for risk than others and in the current climate it is perhaps inevitable – and right – that larger firms are increasingly entering into purchasing agreements”
This isn’t the only way that collaboration can help with the mitigation of risk. Some contractors have broader shoulders for risk than others and in the current climate it is perhaps inevitable – and right – that larger firms are increasingly entering into purchasing agreements. They are also exploiting economies of scale to purchase materials that are then passed down the supply chain to help ensure smaller firms are not left with significant balance-sheet risk. Large firms can aggregate demand, in other words, to mitigate the cost pressures felt by the entire construction ecosystem.
This point reflects the very essence of the response to the current climate: a willingness to collaborate and accommodate. This means embracing advanced payment agreements to keep the supply chain solvent for projects that are under way, providing opportunities to rephase projects where needed to spread the financial risk more evenly, and advanced purchase agreements to help keep the sector buoyant and projects moving.
Sir Robert McAlpine prides itself on strong supplier relationships, and we will be working with our own supply chain and the wider one to deliver projects successfully and sustain a healthy industry. A rising tide, it is said, lifts all ships, and by working together the sector can pull through.
A past crisis provides the key
We’ve done it before, after all. The challenges brought by COVID-19 required the sector to pull together in a single direction to help the government meet its policy objectives. These values have found permanent voice in the public sector Construction Playbook and were echoed more recently in the Construction Leadership Council’s guidance on Ukraine, which urged the sector to come together. Both sets of guidance encourage collaboration and an end to undercutting, which now needs to be carried across to private-sector projects, too. In the response to one crisis lies the answer to another: collaboration, and more of it.
The value of collaboration is the lesson the sector needs to learn from the current climate. Inflation poses financial risks for all parties and it is only by working together that we can jointly mitigate the effects of inflation. Sure, inflation is a hurdle, but it is not insurmountable.