Inflation impact intensifies

Surveyors confirm that rising cost inflation may soon start to create an impact on workloads and profits.

The third quarter 2021 UK construction survey from The Royal Institution of Chartered Surveyors confirms that supply chain disruption, material price inflation together with a shortage of skilled labour continues to intensify.

Workloads remain strong, led by new infrastructure schemes but could well come under threat.

The pace of total activity slipped slightly from +38% in Q2 to +33%in Q3, respondents reported high levels of construction work with energy, roads and water revealing the strongest outputs. Forward looking indicators point to the sector continuing to experience strong growth over the course of the next 12 months.

However, the private commercial sector, such as office and retail developments, showed the slowest uplift in activity, but the +19% net balance indicates this area is seeing business improve and projects resume.

The availability of construction materials was the biggest challenge cited by respondents as supply chains across the UK struggled. In the final quarter of 2019 just 14% of respondents indicated that this was an issue for them. By Q2 2021 this had jumped to more than half of all respondents identifying that this was an issue. Now it is almost at 89%.

Alongside materials, there are increasing concerns about being able to source sufficient people with the necessary construction skills. In the latest survey labour shortages were cited by over 80% of respondents which compares with two-thirds in Q2 2021 and 42% just six months ago. Respondents said bricklayers were the standout problem for 69% but carpenters, plasterers, electricians and plumbers are not very far behind.

Business enquires remained firm in the third quarter (+40%) which is consistent with the upbeat expectations for activity into 2022, and while the headline workload expectations metric slipped from Q2 at +44%, it remains indicative of a firmly positive trend.

There were fewer positive expectations however around profits recovering among construction firms given the increases in material prices across the sector. Tender prices are projected to increase by close to 5% over the period, with materials costs viewed as likely to rise by around 8%. This could make the delivery of some projects unviable.

With the COP-26 conference taking place in Glasgow respondents reported apparent indifference from investors to sustainability issues. Approximately 22% said they had seen no shift in support and nearly 40% said only niche investors had shown an interest in building more sustainably. Some 56% of respondents said that biodiversity was not considered at all in most of the schemes on their books.

Simon Rubinsohn, RICS chief economist said: “Activity remains strong in the construction sector with infrastructure projects, including the Thames Tideway Tunnel, Hinkley Point C and HS2, continuing to drive momentum alongside residential developments. However, the feedback from respondents to the survey is unsurprising and also highlights increasing challenges around sourcing key building materials and skilled labour”.

“The impact of these trends on costs is expected to continue throughout the coming year and is reflected in a mixed picture around the likely improvement in profitability accompanying the broader recover in the sector”.