Rising costs and skills shortages expected to weaken construction industry outlook

As the population of the UK inexorably increases, the most frequently employed stock response in political circles is to promise to build more houses. In Scotland alone, the Holyrood Government has a target of 50,000 new affordable homes.

Vast sums of money have been allocated with a view to upping the building rate and encouraging councils, housing associations and construction companies to deliver new accommodations despite a challenging economic environment. While such ambitions are laudable, there are many factors which can throw plans off target, and it is becoming clear that considerable increases in the price of building materials is heading up the worry list.

A newspaper investigation earlier in the year disclosed that some of the essential raw materials of the construction industry in the UK have been hit by price increases of up to 35%. Hikes of this magnitude can push the most meticulous margin planning into disarray. The costs of some construction components, including plasterboard, chipboard and loft insulation, are rising at their fastest rate for 25 years. The Construction Trade Survey from the Construction Products Association in Q4 last year showed that overall costs increased for 88% of civil engineering contractors, while 75% of main contractors also reported a rise in raw materials costs.

The main blame for these cost rises has been laid at the door of Brexit, with the subsequent decline in the value of sterling which is producing industry-wide inflation. Increased energy prices are also hitting manufacture of items such as bricks.

Nearly a quarter of building materials supplied in the UK are imported and a modicum of good news is that, in a typically proactive response, many trade suppliers are actively seeking to source alternatives to traditional markets. But as well as cost issues, the construction sector is beset by an ongoing skills shortage affecting key on-site trades, with main contractors reporting at the beginning of the year that shortages of carpenters and plasterers were at their highest in nine years.

The Federation of Master Builders also warned of a shortage of labourers. Nearly one in eight comes from outside the UK and there is concern that many of these employees may decide to repatriate in the event of a hard Brexit. As well as material costs, wage inflation is playing its part in the worries affecting construction. A survey by recruiter Hays showed that average salaries in construction and property rose by 2.8%, with building services achieving 3.5%. Nearly two-thirds of building service employers said they had raised salaries over the course of 2016 and the same proportion expect to have to offer similar rises in 2017, with 16% anticipating that these increases will be in the order of 5% or more.

It is hardly surprising that the Office for National Statistics recorded a 1.2% decrease in construction output in May this year, both month on month and three month on three month. The most notable decline was in infrastructure, which fell 4%.

The construction industry is resilient. It has to be, considering the wide variety of external factors which can buffet it unexpectedly. But despite all its efforts, a weaker outlook for the rest of 2017 seems inevitable.

By Andrew McFarlane, consultant in the Glasgow North office of DM Hall Chartered Surveyors and a Fellow of the Royal Institution of Chartered Surveyors.

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