Rob Driscoll is director of legal and business at the Electrical Contractors’ Association
The UK construction industry has faced a very challenging two years, but it has proved itself to be highly resilient. However, we must prepare ourselves for even more bumps in the road. On the positive side, at least, we have some idea of what might lie ahead.
In 2020, Brexit caused supply delays for the UK, which were quickly compounded by the global pandemic, resulting in a virtual shutdown of the global logistics industry. More recently, as the world looked to regain a semblance of normality, freight was displaced and China’s industries changed gear, creating huge regional demand for raw materials, which drew supplies away from other markets.
Further delays in the Suez Canal and other ports compounded these problems, making it easy to see just how fragile the interconnections of our world can be – and how their interruption can leave us with shortages and rising materials prices.
Further economic shock came earlier this year when Russia invaded Ukraine. In these deeply troubling times our thoughts are first and foremost with the Ukrainian people. If we consider the further supply chain disruption caused by this grim turn of events, the economic landscape for construction contractors looks even tougher to navigate.
Peril amid rising activity
Against this backdrop, demand in the construction industry has, perhaps surprisingly, returned to above pre-pandemic levels and contractors are reporting healthy order books.
“A survey by the EDA at the end of 2021 showed that 80 per cent of respondents were seeing inflation of above 10 per cent on materials”
But this rising activity hides peril for anyone caught out by the ongoing materials shortages and rising prices. It is vital that contractors who are quoting work continue to account for anticipated price inflation for materials and labour over the next year at least.
Although general inflation in the UK economy is about 5.5 per cent (March 2022), it does not give a true reflection of what is happening in different parts of the sector. A survey by the Electrical Distributors’ Association (EDA) at the end of 2021 showed that 80 per cent of respondents were seeing inflation of above 10 per cent on materials. The other 20 per cent mentioned material cost inflation of between 5 per cent and 10 per cent.
Don’t forget UKCA
Yet another factor to take into consideration is the introduction of the UK Conformity Assessment (UKCA) certification, which will be required on electrical products from January 2023. Manufacturers have already noted that testing their products to comply with the new certification will take time. If UKCA marking rules proceed, then as 2023 approaches we can expect even more constrained product supplies and delays.
The industry has had extra time to prepare for the UKCA introduction as the government postponed it for a year. It seems unlikely that further delays will be offered, so contractors must be ready.
For any work that is due to start several months in the future and last for many months, basing a quote on today’s prices is almost certain to lead to squeezed profits or even losses. This means that planning ahead is crucial. The worst approach would be to win work now, only to find that you have bought problems for your business next year because your pricing was a year and half off.
Communication is crucial
The ECA works within the Construction Leadership Council (CLC) to raise awareness of these major issues. As a result of its joint work, the governments of Wales and Northern Ireland have already issued guidance advising public-sector procurers to share the risk on delays and price volatility. We would certainly advise that if contractors are to survive they need to take the same proactive approach with all their clients.
“Some clients are already working with contractors to identify materials at high risk of price rises and agreeing to pay the price at the date of procurement”
In principle, there are already mechanisms in most standard contracts linking materials to inflation. This means that, unlike trying to accommodate the contractual impact of COVID-19, the industry has some precedent (dating back to the economic turbulence of the 1970s and 80s) for future price changes that could apply here.
The critical message is that good client communication is key, so talk to your clients about what is coming and work together. Some clients are already working with contractors to identify materials at high risk of price rises and agreeing to pay the price at the date of procurement. Whatever the solution, make sure you are considering materials cost inflation in our sector, not just the general economy.
Although the issues we face in the 2020s are daunting, the overall picture is of an industry that is better prepared for challenges than ever before. Some of the major difficulties can be anticipated and their effects are understood. Knowing the problems in advance and planning accordingly will reduce their impact on your business.
