Managing price inflation

Managing price inflation

With the industry facing inflationary pressures not seen in the UK for 40 years, cost escalation is a key issue for members across the supply chain. Last week, the Bank of England raised interest rates for the fourth time this year to 1.25% and reported that “construction output growth weakened modestly as rising materials costs and labour shortages caused projects to be delayed or cancelled”.

Against this backdrop, companies need to find ways to manage the risk of cost inflation during a project and Build UK has worked with Wedlake Bell LLP to publish guidance, which is available to FIS members. Managing Price Inflation includes practical advice on fluctuations clauses, negotiating new and existing contracts to take inflation into account, and how to mitigate its impact on projects. As with COVID‐19, all parties are advised to collaborate in finding solutions, as more time spent planning ahead and thinking strategically about procurement is likely to be the first step towards successful cost management.

For further information on prices and inflation and work FIS is doing to support members in this area, click here. 

Price inflation and a diminishing labour supply are now of greater concern than product availability

Price inflation and a diminishing labour supply are now of greater concern than product availability

Statement from John Newcomb, CEO of the Builders Merchants Federation and Peter Caplehorn, CEO of the Construction Products Association, co-chairs of the Construction Leadership Council’s Product Availability working group

Price inflation and a diminishing labour supply are now of greater concern than product availability in most construction sectors.

In terms of availability, little has changed since our last report, with a good supply of most products and materials. Ongoing challenges continue to affect bricks, aircrete blocks, roof tiles, chipboard flooring, gas boilers and other products requiring semi-conductors within sub-components, all of which will be subject to longer lead times throughout the year.

The market is becoming more adept at managing supply of these critical products, and the long-term nature of some of the underlying issues. Although there are reports of delays in supply of boilers leading to extended completion times in new housing, new semi-conductor capacity is coming on stream in late 2023/2024, and expansion in existing capacity will feed into the market over the same timescale.

Demand remains strong in all areas, and this is set to continue into the autumn, although some product forecasts now anticipate a slight slowdown in housing starts towards the end of the year, stemming from rising prices and concerns about affordability. Home improvement work will depend on levels of consumer confidence as costs of living rise.

Members of the group raised concerns regarding the threatened rail strike. This will affect aggregate and concrete deliveries to major infrastructure products, highlighting the need for government to prioritise transport of construction materials should the strike go ahead.

There is, however, some good news from parts of China. With Shanghai gradually removing covid restrictions, production should normalise in that major industrial region by mid-June. Shipping analysts warn, however, that this may exacerbate the current bottlenecks in deliveries to the West.

Across the board, managing price volatility and labour are now the biggest issues.

Although labour shortages are affecting manufacturers, the greatest concern is expressed by housebuilders and SME builders, as it takes at least three years to train a skilled tradesperson.

The cost of energy and fuel are major drivers for price volatility. Initial results of the Group’s horizon scanning exercise suggest energy hedges are short term and very significant increases are expected to come through quite quickly. This will particularly affect energy-intensive products including steel, glass, plasterboard, cement, ceramics and porcelain.

Although steel prices have come down slightly, since initial disruption following the outbreak of war in Ukraine, energy prices remain a major issue and price volatility will continue. Market prices will also be affected by the Indian Government’s unexpected increase to export duties on iron ore and steel, effective from 22 May.

The CLC group will continue to actively engage with energy intensive manufacturers over the coming months, and closely monitor market conditions and the impact of any further price increases and volatility.

Price inflation and a diminishing labour supply are now of greater concern than product availability

Construction Product Availability Statement May 2022

Statement from John Newcomb, CEO of the Builders Merchants Federation and Peter Caplehorn, CEO of the Construction Products Association, co-chairs of the Construction Leadership Council’s Product Availability working group

With the Product Availability Group having met only three weeks ago, there has been little change in respect of overall product supply since our last report, although the conflict in Ukraine is likely to affect some timber supplies later in the year. There is a good supply of most products and materials but, as previously reported, ongoing challenges continue to affect bricks, aircrete blocks, concrete products, PIR insulation products and gas boilers all of which are on long lead times.

Most wood products, including structural timber, are fully stocked. While structural softwood will remain fully available, the availability of some other product groups, whose use is concentrated in the joinery, shopfitting and finishing sectors rather than housing, is less certain given their greater reliance on raw material supplies from Russia and Belarus. The most critical is Birch plywood, which will become increasing scarce as summer progresses as outside of Russia there is only limited production from Europe, principally Finland. If the UK market is offered Birch Plywood for later in the year from the Far East, it will be based on Russian Birch logs and will be illegal to import.

Although Siberian Larch cladding will disappear from the market eventually, there are plenty of alternative cladding sources. Similarly, there are alternatives to Russian redwood and whitewood used principally in joinery and shopfitting, although these are generally more expensive.

Some PAG members reported initial signs of a slowing market. These reports are corroborated by recent published data from Glenigan, pointing to a slowdown in starts on site during the three months to April 2022. These data points suggest that inflationary pressures are starting to influence client decisions in some sectors, continuing the trend seen with softening retail sales over the last few months.

Most regions are still reporting strong demand on the trade side, particularly from larger housebuilders and for infrastructure projects including road building. SME contractors, however, are concerned that local authorities may delay regeneration projects until they can achieve more price certainty through the procurement process. We have also heard of delayed start dates for specialist trades at the end of the product building cycle, that may indicate projects continuing at a slower pace, which may impact both productivity and cash flow.

Price inflation remains a critical issue. We have previously reported the impact of rising energy, fuel and raw material costs on product price, and the latest data published by BEIS shows that annual material price inflation increased to over 24% in March for a basket of materials. With further restrictions on Russian gas and oil imports across Europe we expect that energy price movements will continue to be unpredictable. Some merchants and producers have also reported impacts on the availability of products caused by the outbreak of Covid in China and the restrictions imposed in response to this, which is affecting manufacturing and shipping from Shanghai. Wage inflation is a further concern within the supply chain, with pay rises necessary to secure labour.

Those pay raises have helped to somewhat ameliorate the shortage of HGV drivers, with reports of a record number of HGV drivers taking their tests and estimates that the driver shortfall has reduced from 100,000 at its peak to 65,000.

Despite this, the high costs and risks around haulage and shipping persist; we note reports that some European lorry manufacturers are not taking orders either because backlogs were problematic or pricing of input materials for new vehicles was proving too uncertain. This may put greater pressure on companies to maximise the efficiency of their fleet and keep vehicles for longer than anticipated. Construction product manufacturers and distributors are amongst the largest users of the UK’s road network.

In regards to global shipping, the price of moving a container from the Far East to Europe has dropped as much as 25% from its high at the start of the year, but many forecasters believe that the elevated costs and volatile delivery schedules caused by the container crisis will nonetheless carry on to mid-2023.

The conflict in Ukraine continues to affect certain product areas, as detailed in our last two reports (21 April and 28 March). We are undertaking a horizon scanning exercise to determine the likely extent of disruption particularly in relation to clay, ceramics, electrical products, and raw materials for steel and other production, as well as impact on energy costs.

Price inflation and a diminishing labour supply are now of greater concern than product availability

New Construction Product Availability Statement April 2022

Statement from John Newcomb, CEO of the Builders Merchants Federation and Peter Caplehorn, CEO of the Construction Products Association, co-chairs of the Construction Leadership Council’s Product Availability working group

There has been little change in respect of overall product availability since our last report with a good supply of most products and materials across the UK. That said, previously reported challenges remain for bricks, aircrete blocks, some roofing products, some sanitaryware imported from Asia and gas boilers, all of which are experiencing longer lead times.

The impact of the war in Ukraine is only beginning to be felt by UK construction. There are reports of nickel prices doubling since the conflict began (Russia was a major supplier before sanctions hit), which affects the price of stainless steel. The prices of copper, steel, and aluminium have increased. Taken together with a shortage of supply from major neon producers in Odessa and Mariupol and existing Covid-related bottlenecks for microchips and semiconductors from Asia, the electrotechnical sector is now experiencing inflation on products above 20% as well as price rises between 10-20%. Recent increases in the price of oil will likely affect both fuel and plastics. Although there are no issues expected for structural timber, birch plywood (widely used as a finishing product) and Russian redwood (a predominant source for mouldings) will be affected.

Otherwise, the biggest concern is the rate at which increased energy and raw material costs are driving up prices, particularly for steel, cement, glass and other energy-intensive products. The last three months have seen price inflation of 10-15%, on top of price increases introduced at the end of last year.

While this is challenging for UK construction firms, the impact is greatest for small and medium sized enterprises (SME), which account for most of the industry’s businesses and nearly all of the builders and contractors. While the first quarter was busy for those completing existing projects, there were signs of a dip in demand in home improvement work in March compared to a considerable uplift at the same time last year.

Without price continuity, it is harder for trades to quote for projects on fixed price contracts, and then seek to pass onto their customers any price increases for materials that would otherwise erode their profit margin. Furthermore, as manufacturers reprice materials and SME contractors continue to be required to sign up to fixed price contracts in advance of project delivery periods, considerable pressure is mounting on SMEs at delivery level.

Discussions are taking place within CLC to identify ways and means to manage and mitigate price inflation. We will only achieve a solution that works for industry and clients if everyone collaborates and shares responsibility.

Read the latest FIS statement and resources produced by FIS to support members working at a time of high inflation

New Guidance on quotes and contracts in a time of high inflation

New Guidance on quotes and contracts in a time of high inflation

Off the back of the latest wave of inflation and the most recent statement by the Construction Leadership Council, FIS has produced two new resources to support contractor members.

The first, is a new factsheet that includes recommendations on standard terms to include on quotations that better protect contractors.  The factsheet also provides some basic advice around managing and reviewing contracts in a time of high inflation.

The second resource is a template letter that can be used as a guide for members who find themselves stuck in a fixed price contract  and price changes are now impacting on the viability of the project, the two resources can be downloaded by members below and have been added to the growing array of resources available in the FIS Contractual and Legal Toolkit.

Commenting on the production of the new resources FIS CEO, Iain McIlwee stated:

“These really are unprecedented times and, whilst there is little we can do to stem the tide of price rises, we can ensure that we do all we can to ensure members that have access to the best advice available.  These resources will be discussed at our up and coming webinar on how to review a contract on the 4th May.”

You can read the latest FIS and CLC Statements on Inflation here

FIS Statement: Inflation and Product Availability in the finishes and interiors sector, the what, why, when and how?

FIS Statement: Inflation and Product Availability in the finishes and interiors sector, the what, why, when and how?

FIS Statement on Inflation and Material Shortages (March 2022)

The past two years have, without doubt, been some of the hardest times businesses in the finishes and interiors sector have faced.  Uncertainty and challenge continues into 2022.  After rapid inflation in 2021 across all material groups, the year started with concerns around the impact of ongoing labour shortages, but in recent weeks the escalation of tragic events in Ukraine have started to put pressure on energy and fuel prices further pressure on the supply chain.  This has resulted in the announcement of further price increases and rapid inflation for key materials.  Of particular concern for FIS members are increases in insulation, steel and plasterboard.

Where this impacts existing contractual relationships members are reminded to check contractual terms and consider the relevance and application of any fluctuation clauses.  If you are unable to rely on standard fluctuation clauses, an early conversation with your client in terms of your ongoing ability to fulfil the contract in the wake of rapid and unexpected price increases is essential.

Where you are currently tendering, consider carefully the impact of the current inflationary environment, look to link any fluctuation to material and product prices rather than general inflation or ensure that quotes are time stamped and limited.  Where you cannot negotiate a shared risk approach with your client, you need to seriously consider what could worse case scenario mean to your business if prices drifted?

We encourage all in the construction sector to consider seriously the impact of imposing fixed prices at this time.  The sector is working on every tighter margins and this could impact the resilience and ongoing viability of of businesses in the supply chain.  Where concerns are raised, a pragmatic, understanding and collaborative approach is essential.  It is vital that we work together to avoid conflict and we further encourage all companies to consider signing and adopting the principles set down in the Conflict Avoidance Pledge that has be developed by the Royal Institute of Chartered Surveyors (RICS) and endorsed by the Construction Leadership Council (CLC).

Below we provide some information on the market forces that are resulting in ongoing inflationary pressures and additional advice and guidance related to managing businesses and contracts in a high inflation environment.

The aim is to keep it refreshed so our members are have a clear picture and can have informed decisions up and down the supply chain (last updated 31st March 2022)

Demand Related Issues

The impact of higher than anticipated demand in key sectors like housing and the domestic refurbishment sector (fuelled by growing household savings) have exceeded expectation.  It is not simply UK demand, but we operate in an increasingly globalised market.  A surge in Chinese consumption is linked to faster than expected recovery from the pandemic fuelling property development and investment in infrastructure and notably by global demand for appliances and electronic goods (many of which are manufactured in China).

Supply Side Issues

As we step into 2022 the rapid escalation of events in the tragic Ukraine has sent oil and gas prices and hence energy costs across the world into a period or rapid inflation which is now feeding through into the price of construction products and logistics.   Since 1 April 2021, wholesale gas had risen from around of 50p/therm to around £2.80/therm by the end of March 2022.

You can track natural gas prices here.

Whilst the UK in not overly reliant on Russia or Ukraine for construction products (which together account for just 1.2% of imports of construction products, some areas such as flat glass and certain timber products have a more significant share from these markets.  Projects could also be impacted by shortages of products such as concrete reinforcing bars or other unrelated shortages (such as bricks) which are still ongoing.

The global situation remains volatile and it is impossible to predict accurately the ongoing impact on material and product prices.  Beyond the escalation in Ukraine, tension between the US and China and genuine concerns about UK Conformity Assessment (UKCA) marking implementation limiting availability at the start of 2023 as manufacturers struggle to get products tested in a compliant fashion in time and guidance remains unclear.

Logistical and Freight Challenges

Beyond supply and demand, inflation and availability problems has been further compounded by a number of issues related to freight and logistics, in 2021 we had the Suez Canal logjam, Brexit and pandemic uncertainty .  An ongoing shortage of lorry drivers has also been reported and has put upward pressure on transport costs.   Whilst shipping freight prices have started to ease in 2022, the invasion of Ukraine has pushed up fuel prices.

What’s going on with shipping rates? – McKinsey’s analyse why container shipping costs are surging and give their take on what lies ahead for the industry.

Squeezing the supply chain

A key concern is that in the wake of double digit inflation in the price of some materials and increasing labour costs and despite an increasingly healthy pipeline, we are not seeing equivalent inflation in tender prices, which means margins are likely to be squeezed and in extreme cases businesses could be driven into recession.

The  latest tender price reports from MACE is showing that current tender price inflation ran at 7.5% in 2021 and are expected to rise by 5.5% in 2022.

How can I track and report price movements?

There isn’t currently an index of prices specific to products in the Finishes and Interiors Sector, but you can draw out the main material movements via the Office of National Statistics, note this is lagging and prices are changing fairly rapidly at the moment.  It also doesn’t necessarily reflect prices on the ground due to specific grades/distribution buffering etc.

The World Bank commodity price index and London Metals Exchange give a high level picture, but doesn’t get into the detail on products used in the finishes and interiors sector.

The RICS publish the annually the BCIS Material Price Index

Probably the best reference is via the merchant groups, for example :

For the sake of balance, if you publish a similar index, please don’t hesitate to pop a link over by email or in the chat and we’ll include it here.

Information on price of paint from the British Coating Federation

FIS track labour prices on a half yearly basis with information available to contributors.  If interested in learning more email iainmcilwee@thefis.org.

When can we expect an end to all of this?

With such a perfect storm of complex and cumulative issues it is difficult to know when we will start to notice improvement or how much worse things may get.  The old adage hope for the best, but prepare for the worst comes to mind.

Certainly data from the RICS (published November 2021) construction materials costs in the UK continue to escalate, reaching a 40 year high based on the annual growth of the BCIS Materials Cost Index.  According to Joe Martin, BCIS Lead Consultant “The pressure on materials prices and availability is expected to continue at least until the end of 2022. Labour shortages are expected to evolve as the significant driver for overall construction cost increases next year and the construction sector would need to compete for it with other sectors”.

Above was before the situation escalated in the Ukraine.  The Construction Products Association have prepared for FIS Members an update on the wider impacts of this tragic conflict.

Top tips for contracting in a high inflationary market

FIS have produced a new factsheet for members looking at some standard clauses to include with quotations and top tips for contracting at a time of high inflation.

Bring your concerns to FIS

If you feel you are being treated unfairly, talk to us, we will do what we can.  We can, through our own contacts in the industry, the CLC and contact with the Small Business Commissioners Office and Civil Service shine a light on negative trends and poor behaviour, it can be done anonymously and handled sensitively so as not to damage your relationships.

FIS is urging the supply chain to heed the advice of the Construction Leadership Council and adopt a collaborative approach and ensure that there is ongoing and open communication through the supply chain and we are doing all we can to work together rather than tearing lumps off of each other.

Too often construction get contractual and adopts a siege mentality, parcelling up and firing risk out hoping it sticks elsewhere.  The much talked about transformation must start now, rather than pushing risk down the supply chain, we need to be communicating with clients, helping them to understand that these events are beyond the control of individual companies and we need to work together to resolve and manage.

Our supply chain has had an unprecedented and difficult year, we need to nurture it back to health, not return to old and punitive ways that will ultimately drive people out of business to the detriment of all.

Useful links:

FIS Webinar: Managing your business in a time of shortage – Listen again here

You can access the latest Construction Leadership Council Product Availability Statement here (21 April 2022).