Pressure builds on small contractors as energy and material costs soar

Many construction businesses are under “considerable pressure”, as the war in Ukraine continues to drive up inflation, industry leaders have warned.

The Construction Leadership Council’s (CLC) Product Availability working group said small and medium-sized enterprises (SMEs) working on fixed-price contracts were feeling the impact of ramped-up costs.

Russia’s invasion of Ukraine has destabilised international trade, sending energy and fuel costs soaring, while tightening the supply of key materials.

The CLC working group said that steel, cement and glass prices have all increased by more than 10 per cent since the turn of the year.

“The impact is greatest for SMEs, which account for most of the industry’s businesses and nearly all of the builders and contractors,” said group co-chairs John Newcomb and Peter Caplehorn.

“As manufacturers reprice materials and SME contractors continue to be required to sign up to fixed-price contracts in advance of project-delivery periods, considerable pressure is mounting on SMEs at delivery level.”

While the first quarter of the year was busy for project completions, there were signs of a dip in demand for new home-improvement works in March, the group said.

“Without price continuity, it is harder for trades to quote for projects on fixed-price contracts, and then seek to pass on to their customers any price increases for materials that would otherwise erode their profit margin.”

The group warned that the impact of the war in Ukraine on the UK construction sector was “only beginning to be felt”.

“Discussions are taking place within CLC to identify ways and means to manage and mitigate price inflation,” added the co-chairs.

Meanwhile, Turner & Townsend has almost doubled its real-estate tender-price-inflation estimate for 2022 to a whopping 8.5 per cent.

“High energy prices are steadily dialling up inflationary pressure on project costs,” said the cost consultancy. “Supply chains have also experienced further disruption, with the conflict in the Ukraine and sanctions on Russia adding to demand pressures, low freight availability and port congestion.”

This was prompting contractors to add “significant risk allowances” when bidding for work, Turner & Townsend said.

“Labour costs are also growing,” it added. “Construction vacancies are high, employment low and National Insurance contributions have risen.”

Construction Alliance North East this month said soaring energy prices and increasing material costs posed a threat to small construction firms. In March, industry analysts and trade bodies also warned that shortages and price hikes affecting materials and deliveries could bring big projects in the UK to a standstill.

Leave a comment