What can firms do amid rising material costs and inflation?

Michael Riordan is managing director, UK, at Linesight 

The rising cost of essential building materials has been a major concern for the construction industry for some time, fuelled by the now all-too-familiar factor of high energy costs. Then came the Russia-Ukraine war, which has simply piled more pressure on the energy environment, just as the UK heatwave has put climate concerns back at the top of the agenda while the government is in flux.

Encouragingly, new research by Linesight suggests that stability will return to construction material costs after the pandemic-driven and conflict-exacerbated volatility of recent months.

Yet, our data also paints another picture, revealing uncertainty about the cost of major building projects, thanks to rising global energy prices, supply-chain disruption and higher interest rates. This is certainly topical.

Spectre of inflation

Responding to the spectre of inflation, which it now believes will peak at more than 13 per cent by the end of this year, the Bank of England last week hiked its base rate by 0.5 percentage points – the biggest single increase in three decades, taking the base interest rate to 1.75 per cent, the highest it has been since December 2008.

Announcing the rate increase, Bank of England governor Andrew Bailey said the UK would head into a recession later this year, from which it may only emerge towards the end of 2023.

“The latest interest rate hike makes life challenging for clients hoping to plan for large capex projects”

This can only dent the industry’s confidence even further, certainly in the short to medium term. The recent political upheavals are not helping, with a lack of clarity about the government’s long-term investment strategy.

Together with supply-chain and logistics disruption, and labour shortages, the latest interest rate hike makes life challenging for clients hoping to plan for large capex projects. Such schemes need an advanced approach to planning and procurement to ensure programme times and cost are managed successfully.

Open-risk sharing

So, what can the industry do? In the current climate it is vital that firms take a strategic procurement management approach and adopt open risk-sharing with contractors. They should combine relationship-based supply-chain management, quantitative risk analysis and what we term an elevated level of ‘value engineering’ to help reduce risks, and provide better predictability of outcome.

In terms of the immediate trends for material prices, our research suggests steel costs are heading downwards, after pursuing a relentlessly upward trajectory for the past 18 months. Copper prices have weakened recently, and are forecast to further reduce by 17 per cent between the second and third quarters of this year.

Lumber prices, which eased slightly in the first three months of this year, are now trending upwards again. Challenges in distribution will prevent further easing, with prices expected to rise by 1.5 per cent by the autumn. Sentiment in the residential market is likely to be hit by talk of an economic downturn, resulting in weakened demand.

Rising energy prices

Ongoing strong demand and upward pressure on production costs stemming from rising energy prices will keep brick prices inflated, with an anticipated 1.5 per cent increase by the end of September.

Meanwhile, shortages in supply and high demand were factors in rising cement prices in 2021, while the upward trend this year is partly a reflection of the surge in energy prices that have pushed up production costs.

“We expect crude oil prices to fall, and diesel prices should start to ease by the fourth quarter”

Diesel prices will remain high in the next two quarters, compared with pre-covid levels, fuelled by a high degree of uncertainty as the Russia-Ukraine conflict continues. However, we expect crude oil prices to fall, and diesel prices should start to ease by the fourth quarter by anywhere from 1 to 5 per cent.

While material prices will remain a concern, and despite the uncertain environment created by the perfect storm of challenging market conditions, we should not lose sight of the fact that construction output has continued to grow, with seven consecutive months of growth to May this year, with output more than 4 per cent above the pre-pandemic figure.

It is crucial that the industry gets clear and unambiguous guidance on government investment plans – and potentially government assistance – in order to deliver the level of construction output that will be required to meet current demand. One for either Liz Truss or Rishi Sunak to grapple with come September.

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