The Impact of Rising Build Costs
IT’S BEEN SAID THAT ANYTHING CAN BE ACHIEVED, AS LONG AS YOU HAVE ENOUGH TIME AND MONEY.
You don’t necessarily need to be Kevin McCloud to know that rising build costs can have a significant impact on a project and that careful analysis is critical to budget planning so that costs don’t spiral. The key objective here is making sure you have the funds available to achieve what you want, before you start.
When undertaken on a private basis, the planning section and establishing costs is invariably then immediately followed by the works themselves ensuring a degree of accuracy in the market conditions. One of the common difficulties when working with clients that have gone through, or are going through, the process of litigation is that this element can often be undertaken, agreed and paid to a claimant or their legal representative months, or even years before a spade hits the ground. It makes it an unforgiving task for all stakeholders to ensure that this is acknowledged, understood and allowed for in order to deliver a suitable outcome for the person whose home is being created.
The purpose of this article isn’t to run a microscope over the litigation issues regarding quantum’s, negotiations and agreed level of remuneration levied against this critical part of a case, but more to identify some of the key factors that can affect it later down the line. And discuss the practical impact these may have on a client’s (and their advisers) ability to achieve the outcome they will so desperately need.
From the start of a Property Purchase Search, it is good practice to set a client’s aspirations on it being 24 months before they will move in to their new home. There’s a magnitude of reasons for this (best left for another time and article!), and of course this timeframe can be reduced, but on balance once a property has been found, purchased, redesigned, had planning agreed, tender process completed and works undertaken – you’re never that far off. That means there’s plenty of time for things to change. Take the last 12 months as a prime example, and you can throw in the next 12 months to help illustrate the point for good measure. Brexit, whether for or against, is going to have an impact on the economy – it’s also something that 18 months ago not many people thought would ever happen. It has meant budget planning, based on an economy which can go one way or another, possibly on the toss of a coin, is not exactly straight forward (to say the least).
Since the start of the summer, whilst not jumping on a scaremongering band wagon, there has been an impact on markets – and to this point, because of the uncertainty, they seem to have been predominately negative. People far better qualified than we are unsure of the outcome, which means we can only act on what we know.
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The Royal Institution of Chartered Surveyors’ Building Cost Information Service (BCIS) is forecasting that tender prices will rise between 4.5% and 5.5% every year until 2020 at least. Identified within this shows that labour cost inflation is the primary culprit for the continuing rise in building costs, but increasing material costs also play their part.
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This is something which is already forecast quite high and rightly so, it is however still uncertain the extent of these issues and it will probably be quite some time before we know for sure. Taking a reduction in access to the open market could see a further increase in material costs across the board, over and above what has been forecast by BCIS. In addition, and I’m raising this tentatively, a large portion of the labour force which operates in construction is from other areas of the European Union – should restrictions be levied this could not only impact a companies’ ability to resource a project, but also effect the wages of their staff – both of which will have a northward impact on the bottom line. Again, and to highlight, this isn’t to say each of these things are going to happen, but at this stage one would be very brave to say that it definitely won’t.
Now this isn’t a Euro debate, not even we’re brave enough to enter the fray on that one, but it has to be sensibly acknowledged that these items could become a factor. And when budgeting for works that may start next June or July can cause a problem, especially in light of the guidelines given above on the forecasted increases.
If we therefore take the forecasted rise of build costs into a working example, a tender returned today for say £250,000, would increase by £22,500- £27,500 for the same amount of work in two years’ time which at this level is a reasonable jump. In this situation, you have only two options, if the case were ongoing additional funds would need to be applied for, and if the case had been settled, a redesign and possible compromise on the project would have to be considered in order to make the works achievable. Clearly option B is far from a satisfying conclusion for a client, having got to this point after a life changing experience. It’s often the case that elements from elsewhere in a claim get utilised to subsidise the work – more so when dealing with modest numbers however we have seen numerous occasions recently, where cases settled some time ago and for various reasons works suspended, where tender returns have been submitted way in excess of the budgets in place
This is why it is essential that the potential/projected rise in building costs needs to be taken into consideration to avoid budget overspends, delays caused by external factors such as planning or environmental consents are all too common when the proper measures haven’t been taken at the outset.
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In addition to anticipating rising build costs, there are several ways to help protect your budget:
- Ensure you have undertaken comprehensive due diligence before purchasing the property to avoid any later delays due to anything from asbestos to subsidence. Having this information early on will set expectations on the works required to the original building before any extensions, adaptations or remodelling is undertaken. It also means any significant issues can be identified before a transaction is complete, and therefore renegotiated accordingly – allowing critical additional funds.
- Setting realistic targets in terms of what can be achieved through careful and considered planning and design.
- Minimise variations during the execution of the works. This is as much about educating the client as anything else and is only reduced by ensuring proper involvement by all stakeholders is incorporated – along with aspirations, at the outset.
- Incorporating sufficient contingencies within the programme.
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Whilst there is not an exact science to the implementation of this, it’s key that all stakeholders are aware of the potential issues. It’s often the case where works are put on hold for various reasons, whether it be family dynamics, health reasons, changes in circumstance or planning and design. When there works are to be held for a period in excess of 6 months, it’s essential that these discussions are had at the outset so that aspirations can be set and there is an understanding of the market factors plus the impact they can have.
For those of us that deal with property and projects on a daily basis, this can largely be seen as common sense. What can easily be overlooked is that the individuals we work with, along with their support teams, have had this thrust upon them and won’t necessarily have any prior knowledge to draw upon. In conjunction, and as we know, they are also contending with catastrophic changes to their daily life which naturally increases stress levels. If these additional steps have been taken in to consideration it ensures that all stakeholders are working on the same understanding. Whilst these conversations may be difficult, in the long term they can help to mitigate any negative impact, and give the client a more realistic understanding of what can be achieved in changing markets.