Who would have predicted this time two years ago the shape of not only the domestic, but also the global market as a result of the effects of both Brexit and the pandemic?
With two seismic events and their impact now firmly on the agenda for all of us working in the built environment, ahead of us now are the new challenges facing our industry including the increase in reported costs of raw materials and components.
At RLB we remain close to our supply chain and like many, have received numerous emails over the last few months confirming significant price rises to steel, copper, glass, aluminium and the associated products of which these raw materials are a component part.
As an industry we know it is not unusual to see price fluxes. Yet with many in the supply chain still reeling from the last 18 months, it is important we understand not only the driving factors that have caused these price increases but also offer an opinion as to the likely effect, the potential longevity of any trend but also, and most importantly, what action we can do to help provide solutions to some of these challenges.
So what are the primary reasons for these material price increases?
Hardly surprising to anybody is the effect of disrupted production of material and components as a result of the COVID-19 pandemic. Changes in working practices have resulted in reductions in production rates that have affected supply. We currently have a situation where even if the materials and components were available to be shipped for onward assembly or to their final destination the containers and ships that carry them are now in the wrong locations around the globe. The blockage of the Suez canal disrupted the cyclical nature of cargo shipping around the globe, resulting in container ships in the wrong locations and containers left stranded.
In the UK we have seen, like many other countries, an increased demand in the home improvement market as the British public spend the money saved making the most of their homes that they have lived, worked and stayed in for the last 14 months.
There has also been regulation and governance changes as a fallout of the Brexit hangover including regulation that facilitates the import of material into this country. And unless our government continues to recognise the European Product Safety Mark on the 1st Jan 2022 all imports into the UK will be subject to our own new standard, the UKCA Certificate. This brings with it the concern that suppliers will simply focus on alternative markets outside of Britain rather than put their materials and products through a new testing and compliance regime at their own immediate cost which would then be recovered over time through their UK customers.
Combine the lack of raw material, a delay in the normal supply chain with an increase in global demand driven by China and the USA’s own Public Sector spend programmes and our own increased domestic demand and we reach a point where the limited supply cannot meet the demand resulting in price inflation. So to summarise, the whole world is busy equating to an increased global demand, a resulting limited supply and a hiccup in the normal delivery logistics of raw materials. And in the UK’s case, a change in legislation potentially causing suppliers to prioritise other markets outside of our own. It does feel a bit like the perfect storm.
What will be the effects of high demand and low supply market forces?
It’s not difficult to see that the effect of all this is an increase in the cost of material, components and equipment. However, it also means that for certain items of equipment such as fan coil units and façade systems, lifts and cladding, lead in times will start to get longer. As well as the resulting increase in cost and lead times, the market could react in a number of ways: reduction in fixed price periods; additional price risks; increased construction periods reflecting supply risk and contractor and supply chain failures as costs increase in excess of the fixed price allowances.
Today’s questions to gauge tomorrow
So, what should those looking to build today be looking at for tomorrow? As consultants to clients building projects ranging from the provision of new hospitals, innovative infrastructure projects, industrial and logistics depots to datacentres, there are a few questions we feel everyone should be considering:
- On existing projects where does the burden for these increased costs and delays sit?
- And for those projects still in design, is this a temporary state that will level out or is this a sign of long-term construction inflation?
- How do we work with design teams and clients to ensure that we can still meet their overall value aspirations as prices are rising?
- How can we help designers innovate and produce solutions that still work within the constraints that we find ourselves?
- Will price inflation lead to schemes being cancelled? What is sensible advice on tender returns and risk transfer – for example longer term guaranteed portfolios of works rather than tendering individual projects?
What can we do?
The question for all of us is what we can do to ensure that we remain as resilient as possible for the foreseeable future. Our answer remains the same as it is whatever the state of the market. Stay close to the supply chain and unite as an industry. Discuss with designers, architects, planners, contractors, sub-contractors and specialist suppliers what alternative design solutions may be available that offer mitigation to price increase and supply risk. Ask them for their opinion and advice on potential changes to price and delivery that they may be making. Feed this back to your clients, fellow consultants and the supply chain. As we have seen over the last 12 months with the work that the Construction Leadership Council has undertaken to unite the industry with one voice, when we work together, we can draw a better picture of what is happening, and how long it might happen for and consider the wider issues that will affect our industry.
Someone far smarter than me said, “Forecasting is really easy until you start talking about the future”. If there is one thing we have learned over the last 18 months it is that we cannot predict the future and there will always be curveballs along every journey. However, what we can do is work collaboratively, stay informed, gather the information that will bring us to a connected starting point to help us work through these industry challenges together.