The nightmare of escalating construction costs

A house under construction

Halloween may just be around the corner but a different sort of nightmare is already affecting anyone attempting a construction project. For our clients who need to undertake an essential project the issues have been increasing for some time, and serious problems could be around the corner for those who haven’t been able to plan accordingly and factor in the impact that rising costs are having.

We have been concerned about rising costs for some time and, like many, had hoped that with the pandemic starting to recede there would be signs of stabilisation. The reality is proving to be very different, and our concerns are that the biggest problems have yet to be seen.

The last year has shown a rapidly changing picture in the building industry altogether. For a start there is a boom – projects put on hold during Covid have reopened and there is desire to progress with these rapidly. At the same time massive infrastructure projects are coming on stream and creating a significant shortage of building materials. Projects such as HS2 have impressive buying power and are simply draining the supply chain dry. Add to that the USA buying up high quality timber supplies, short time working during the pandemic at factories such as British Gypsum, the misalignment of containers and goods requiring global transportation, HGV driver shortage and Brexit delays at ports for imported materials, we’re probably already in the eye of a perfect storm that many are yet to get to grips with.

Whoever you are, if you are undertaking a project you are feeling the effects of the storm in some way. Both materials and labour are in desperately short supply. As a consequence, not only are there significant delays in the supply chain but the cost is also escalating. One of the manufacturers of roof tiles reports that they are 1 million roof tiles behind. That is a massive backlog and is going to affect a vast number of projects. This sort of shortage creates a supply and demand problem which pushes prices rapidly ever higher. And there are much longer lead in times as well. Your local supermarket is not the only place with increasing numbers of empty shelves, building merchants’ yards are no longer full of stock that you can drop by and collect and there can be a 15-20 week wait for some materials. We have been discussing this with some of the builders we work with and there is a very common theme.

Gareth Smith of Oliveti said:
“Costs are going through the roof. We were paying £200 a day for a bricklayer a few months ago. Now we are lucky to get one for £350. As for materials, the prices are going through the roof too. Steel and timber are up by 50% in just a few months and that’s if we can get hold of them at all. The big issue is that I am not even sure I can see an end in sight which makes forward planning or pricing lengthy projects virtually impossible.”

Brad Whitman of Whitmans Builders has noticed the escalating prices causing difficulties pricing projects. “It’s a nightmare! With price increases on materials happening every few weeks, it is impossible to accurately predict costs of a project being put out to tender with a view to starting a few months down the line. Some of the projects where I am already under contract will barely break even as, unless a contract can be renegotiated, we are absorbing the additional cost of materials from the profit margin. But that is simply not sustainable going forward.”

This, of course, means that the overall cost of a project has become very unpredictable over a short space of time. When the cost of a project can be broken down as 60% labour and 40% materials, and when the prices of those materials are rapidly rising, sometimes as much as by 50% in the space of a few months, being able to accurately calculate the cost of a project into the future is virtually impossible.

We have been analysing a lot of these costs and many in the industry feel that costs have risen by as much as 15-20% in the last 12 months but our view is that this figure could actually be much higher, maybe by a further 15%.

Countering the effects of these price rises is not easy. If a contractor is not able to buy ahead and store materials due to simply not having the space to do so, the only other option is to rent space to store materials which again will be an additional cost which has to be met from somewhere. This is also assuming that they have a positive enough cashflow to allow them to do it. It has all happened so fast that there has been minimal time to prepare but here at PLG we are well aware of the issues that these escalating costs and time delays can cause. It is not an easy task but we have taken stock and looked to find solutions to some of the issues.

The selection of contractors, always a vital part of any project, has been more intense and we are interviewing each one to establish their supply chain and ensuring, as best we can, that it is robust. We’re working even more closely with our clients to establish decisions at the earliest possible stage and making sure that where possible orders are placed well in advance to ensure real time, not future pricing, is secured and we are closely monitoring and evidencing requests for early payments and deposits.

We’re also ensuring that contractors are fully aware that advertised lead in times for specialist equipment are rarely accurate and that early ordering is essential to keep projects moving.

Whilst these steps can make marginal gains which add up, the key issue for us is an increasing disparity between sums that are secured as part of a claim and the true cost of completing a project. Factor in a considerable increase in house prices for much of the country and it is clear that anyone who settled a claim more than 12-18 months ago could be finding that the swing is going to have a dramatic effect on what they can buy and adapt. Whilst some clients will be able to make compromises from other areas of a claim, we are seeing many who cant and this is the ticking timebomb for many. Whilst we are hopeful that the issues of supply and demand might have an easing effect on labour costs and physically obtaining supplies, it is safe to say that the cost of materials is unlikely to fall and this is going to have to be factored in somewhere.

Clearly, cases that have yet to be settled, can have this area of the claim reviewed by the relevant accommodation expert but for those that have settled and, for whatever reason, not been able to secure adequate funds it is a huge problem.

A large part of our work is with deputies on cases where settlements have previously been reached and there is already pressure on how the higher costs of adaptations can be met. We’re trying to be creative and look at innovative ways of solving the problem, but there is not an easy solution.

Going forward this is definitely a situation where prevention is better than cure and we would suggest that any case that has a possibility of settling, or where quantum on accommodation is being sought, should have this area of cost reviewed urgently to prevent the claimant having a serious problem.

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