Kier chief sets out inflation strategy

Kier chief executive Andrew Davies has set out the measures that the construction giant is taking to manage soaring inflation, including passing “pressures” on to suppliers in some circumstances.

He told attendees at a Capital Markets event last week that the £3.3bn-turnover firm had a number of strategies in place to handle a “steady increase” in costs.

Government figures published earlier this month showed hikes in a range of material prices, with fabricated structural steel costing 54 per cent more in March than a year earlier.

Davies said Kier had noted the impact of inflation and had measures in place to combat it. “We are seeing certain projects being reappraised and therefore delayed due to cost pressures,” he said.

“There are a number of mitigations we can deploy. In terms of protection against cost inflation, 55 per cent of our order book is under target-cost or cost-reimbursable contracts; for example, High Speed 2.

“The remainder of our contracts are negotiated, including those on fixed prices. Those fixed-price contracts are often fixed at a point in the project cycle when procurement risk has passed, protecting against inflation risk on the project.”

Working across lots of small schemes helped Kier manage inflation, Davies said, as did passing on costs to other parties.

“Another mitigation is the average contract size in our construction business of £12m. They tend to be relatively short in duration, so tend to get renegotiated and repriced regularly.

“We also look to pass through cost inflationary pressures, up to customers under long-term frameworks and down to supply-chain partners where we are able to, and where they are best able to mitigate and manage that risk.”

Kier last week revealed that its order book had grown from £8bn at the end of last year to £8.5bn at the end of March 2022.

Davies was bullish about the contractor’s prospects despite the current difficulties facing the sector.

“We see the UK economic and political landscape as a set of short-term issues and long-term positive fundamentals,” he said at Capital Markets Day. “Short-term headwinds include cost inflation, Ukraine, fears of an economic downturn, and labour supply and supply-chain challenges.

“In the long-term, however, the business is underpinned by the UK’s government commitment to spending – the Levelling Up agenda, net-zero carbon and the desire to create a global Britain. Given our business is countercyclical and Kier is a strategic supplier to the UK government, over the medium term we believe there is a significant opportunity to drive growth and successfully execute in this market.”

The Scaffolding Association earlier this year urged principal contractors to work with suppliers to ensure projects remained viable if prices soared in the wake of the war in Ukraine.

A Kier spokesperson said the contractor had strong relationships with suppliers and only acted with their agreement.

Meanwhile, the Construction Leadership Council set out a five-point plan last week to ease the impact of inflation on the sector.

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