25 June, 2021

UK building costs are experiencing an unprecedented spike.

CBRE has written extensively about the potential for Brexit to damage our economy. Trade with our former partners is now more complex. New rules, transitional problems and delays at ports have disrupted the flow of materials entering the UK. This is affecting procurement activity and project delivery for UK construction.

Labour shortages appear to have been made worse by skilled workers returning to the EU although the evidence on this is patchy. CBRE’s March 2021 Research Report - What Does The Brexit Deal Mean For UK Real Estate suggests that any shortages may well be offset by non-EU workers filling vacancies.

Then Covid-19 happened. Lockdowns slowed the global economy, but most construction in the UK continued, causing the inventory of available materials continued to diminish.

Economies are now emerging from lockdown China and the United States have restarted huge building programmes. Both have drained the meagre stockpile of raw materials, creating a short-term spike in costs and delivery delays for economies coming later to the party. Other factors are in play too, like the six day blockage of the Suez Canal (estimated to have cost up to $10bn in global trade) and the planned closure of northern Europe sawmills for annual maintenance. As this chart shows, prices have risen significantly over the last twelve months.

Annual increase in selected price of building materials, 2021 on 2020

A perfect storm for building costs graph

Source: Building Magazine, 2021

The Department for Business, Energy and Industrial Strategy in May 2021 reported a 9.5% increase in construction materials prices for all works in the year ending 30 April 2021.

CBRE’s latest UK Economic Outlook report indicates commodity prices contributing to higher general (CPI) inflation over the coming months, but these effects are likely to be temporary.

However, cost is not the only issue. For example, contractors Beard have reported extended delivery times. Timber has increased from 2 to 10 days, boarding and sheet from 2-7 days to 4-8 weeks, and steel purlins from 6 – 8 weeks to 20 weeks.

If rising prices are going to be a short-term feature of the market, what should clients with a building project do?

A Perfect Storm for Building Costs social cardIn recently procured contracts that don’t reflect current market volatility, expect contractor claims on cost and programme (or both). A fixed price contract may not fully protect you. The slim margins in contracting mean the risk of contractor insolvency may increase, so assess the impact of cost increases and the builder’s capacity to absorb them. Reserve additional contingency and maintain a dialogue with the builder.

Where there are additional programme risks, agree revised completion timescales with funders and tenants where possible.

For projects about to go to market, reassess the target budget and the inflation allowances. Tenders may rise as contractor’s price volatility risk, so review your risk allocation strategy and contingency levels. Early orders may offer more price certainty as might sourcing materials from non-EU countries.

Still in design? Encourage the design team to specify local materials. Be flexible to design change or material substitution. Build flexibility into contract terms so the choice to adjust the project to always remains in your control.

Companies with mature supply side relationships or sourcing partnerships with vendors, like CBRE’S FUSION programme, will be able to use their scale and buying power to mitigate some of the cost and programme risks currently attached to procuring materials.