Building industry paralysed as cost of supplies soars amid ‘perfect storm for construction’, economists warn

Lingering construction delays could threaten wider economic health and the government’s ‘Build Back Better’ ambitions

Anna Isaac
Monday 06 September 2021 08:04
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UK economy not expected to return to pre-pandemic levels, said Rishi Sunak in March

Builders are being forced to down tools amid a “perfect storm for construction” which is putting the UK’s economic recovery in doubt, industry groups have warned.

The cost of building materials has soared by 20 per cent, exacerbating the problems facing an industry worth around £117bn to the UK economy.

Worker shortages and delayed deliveries within the UK, coupled with a global supply crunch and new Brexit red tape, are already crippling construction projects across the UK and feeding into the price rises.

Along with the rising cost of supplies, bottlenecks in global shipping and shortages of lorry drivers are forcing many smaller building companies, which make up around 90 per cent of the sector (according to industry estimates), to put projects on hold.

The cost of building materials rose 20 per cent year on year in July according to figures released by the business department on Wednesday, and seen by The Independent. Evidence gathered by the Bank of England in the three months to June suggested that supply shortages and labour constraints were starting to hold back the sector’s recovery.

On Friday, house builder Berkeley became the latest construction company to warn investors about the impact from inflationary pressures on the cost of building materials.

It warned of “ongoing issues in the supply chain and labour market resulting from Brexit and the pandemic”, and said that, despite robust house sales, the “operating environment remains challenging” for the construction industry.

Construction accounts for around 6 per cent of the UK’s economic output, and severe delays to projects could have a “knock-on effect on the recovery if construction companies aren’t completing projects quickly”, said Andrew Goodwin, chief UK economist at Oxford Economics, a consultancy firm. This is not enough to drag down total GDP growth by a big margin yet, but if these delays are prolonged, there’s a risk the problem could be magnified.

“If people stop doing building work because they know they’ll face delays, that will start to have a real effect on the wider economy,” Mr Goodwin said. This is because it could undermine confidence, and discourage people from spending their savings – which have built up during pandemic-triggered lockdowns – on improving their homes.

Still, despite the risk of a handbrake on growth, requests from the Federation of Master Builders and other industry groups to alleviate lorry driver shortages by issuing temporary visas to EU drivers were rejected by the business secretary last week.

The logistics industry, already facing challenges because of Brexit, has had to deal with further disruption during the pandemic due to sea and road freight issues, which have contributed to higher costs for companies. Managing supplies is especially hard for small building firms, which have to rely on day-to-day stocks at builders’ merchants, whereas larger construction companies are able to stockpile.

Still, the business department is falling short on some practical steps to help address the problems, according to government officials and people familiar with discussions within the business department’s Construction Leadership Council, which includes a range of construction industry bodies. An industry insider familiar with the group said they felt the government was failing to see the “perfect storm for construction” that was currently under way.

While some problems, such as global shortages of certain products, are beyond the government’s control, there are immediate changes that the government could use to ease pressure on the sector, such as by tweaking the immigration system, the insider said.

Brian Berry, chief executive of the Federation of Master Builders (FMB), said: “At a time when builders’ workloads are surging, the impact of material price increases cannot be overstated.

“The FMB’s latest membership survey reveals that 98 per cent of small builders are seeing prices rise, and they expect this to continue into the autumn.

“That’s why it’s so important that a fair share of materials are getting through to local merchants, and why the FMB has lent its support to calls to put HGV drivers on the shortage occupation list to ease the backlogs in distribution,” Mr Berry said. He added that builders have to rely on a householder’s understanding when timelines for work are stretched.

The construction crunch comes amid promises by the government to “build back better”, and to push forward with efforts to upgrade the energy efficiency of UK homes in order to achieve its climate ambitions.

If government plans go ahead, investment in infrastructure will be at its highest sustained level since the 1970s, according to Jonathan Portes, professor of economics at Kings College London. The government is taking advantage of low interest rates for borrowing to make “hardcore” investments in long-term infrastructure projects, he said.

“But to invest physically, you do need to have construction workers on the ground,” Prof Portes said.

One of the biggest problems facing construction firms in their search for skilled labour is a failure by the Home Office to tailor the post-Brexit immigration system to the needs of industry, he added. Many workers, including those from eastern Europe, are self-employed contractors, a group ill-served by the UK’s new immigration system.

“It’s actually quite liberal for employed people on medium and higher incomes,” Prof Portes said, “but there’s no provision for the self-employed.”

A spokesperson for the business department did not respond to questions about requests from the sector for changes to be made to immigration rules.

However, they noted that the continuing problems in the supply of materials were “caused by a combination of global demand outstripping supply, and the ongoing disruption to manufacturing operations, shipping and logistics caused by the global Covid-19 pandemic”.

They spokesperson added that the government was monitoring supplies of products and materials, and that it would “work with the construction sector on these issues through the regular meetings of the Construction Leadership Council’s Product Availability Group.”

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