Price explosion has building contractors staring into abyss

Saturday July 3rd 2021 The Times - Louisa Clarence-Smith, James Hurley

“Prices are rising at the drop of a hat, where’s it going to end?” Clive May, owner of Briar-Grove Developments, a small bricklaying business in Mold, north Wales, says that contractors are being quoted prices for timber and steel that are “good for only 24 hours” before they rise again.

“Usually, you’re pricing stuff that’s two or three months out. We are quoting for a job for a Premier League football club that starts a year in August — how on earth are we going to price that?”

Fears of construction company failures are growing as the sector is hit by a shortage of key materials and sharp price rises for material and labour costs.

Rudi Klein, a construction barrister, says the majority of the industry works on the basis of “lump sum bids” — essentially a pledge to do the work for a certain price, come what may. As such, delays to materials and price rises can be disastrous. He cites the example of a mechanical services contractor that priced a job last November based on copper at £4,500 a tonne. When work began in April, the metal had reached £7,500 a tonne. “That’s one hell of an increase to absorb but they were stuck with it and it more than wiped out their profit margin.”

Timber prices have doubled in the past year, according to the Builders Merchants Federation (BMF). One contractor said he was being quoted 35 per cent price increases on steel ties needed for brickwork. Another builder said that the price of steel mesh reinforcement, a basic product, had doubled in the past four months.

Some developers want contractors to commit to fixed prices for projects starting next year, putting all the risk of price rises on to contractors. Small builders say they are worried about the risk of damages claims from main contractors if material delays push back the agreed completion date of a project.

Karl Parker, managing director of Pioneer Design and Build, in Crewe, which works on industrial and commercial developments, said contractors that have agreed material and labour prices in the past three months have already seen prices go up. “If the customers and developers they are working for aren’t able to help them out, then you will see contractors going insolvent,” he said. “The other concern is people will start cutting corners to get paid and then in two or three years’ time when the work becomes defective, there’s going to be a major issue.”

The Construction Leadership Council set up a task force of builders’ merchants, contractors and housebuilders in June 2020 to monitor availability as supply chains were hit by site closures and social distancing.

John Newcomb, chief executive of the BMF, who sits on the task force, said there were issues with specific materials last year, but they were nothing like the shortages builders face now because of the surge in global demand.

“What’s unprecedented in this particular situation is we’ve got availability issues across all the core materials,” he said. “Timber and cement have been the biggest concerns. When a builders’ merchant runs out of cement, it’s pretty much like Sainsbury’s running out of milk. We’ve never had issues in 30 years around cement availability.”

Smaller contractors that aren’t used to bulk buying materials in advance are most at risk, he said. “There are fears about credit levels and the financial viability of some of these businesses.”

The British construction sector expanded in May at its fastest in nearly seven years as the lifting of lockdown restrictions led to a surge in new orders.

However, the pressure on contractors poses a risk to the country’s ability to meet demand for homes, warehouses and regeneration projects. Some developers are slowing programmes because they can’t get materials they need. One contractor said a project he was due to complete at the end of this year has been pushed back to the second quarter of next year as that was the earliest they could get cladding.

Klein, former chief executive of the Specialist Engineering Contractors’ Group, says the industry is busy but companies are scared of taking on work because of the fear “they won’t be able to resource it or if they can, price rises and delays could put them on their backs. If you put in a lump sum bid, and work doesn’t start for a few months, you can find yourself in a very serious situation.”

Andrew Jones, chief executive of Londonmetric, the warehouse developer, said the industrial sector would be able to pass on price increases because of high demand for warehouse space. In offices and retail where supply outstrips demand, the cost is likely to be borne by the developer, which could affect the viability of some projects.

Mark Farmer, chief executive of Cast Consultancy, which advises construction companies, said the high level of demand for materials had come as the supply chain was under pressure from Covid and Brexit-related issues. Insolvency for contractors was “a realistic prospect if things carry on like this”.

John Miesner, head of debt advisory at Interpath Advisory, the restructuring firm, is more optimistic: “The general mood of suppliers of debt capital at the moment is that businesses should be given the leeway to trade through Covid and Brexit-related events.”

Brian Berry, chief executive of the Federation of Master Builders, said: “I have real concerns about the viability of jobs and businesses if this continues. I am urging consumers to be patient with their builders, have a written contract in place, and maintain an open line of communication so that any issues that arise get resolved swiftly.”