Common Assessment Standard updated to reflect UK sanctions list

Common Assessment Standard updated to reflect UK sanctions list

Due to the unprecedented situation in Ukraine, which has led to a growing list of sanctions against Russia and Belarus, Build UK will be adding a new question to the Common Assessment Standard to enable the construction supply chain to demonstrate that it is not dealing with any companies or individuals subject to the UK Sanctions List. Version 3.1 will be published on 1 July and suppliers will be required to answer the new question when they next go through the certification process for the Common Assessment Standard.

We are continuing to roll out the Common Assessment Standard across the industry and our new infographic shows how it is improving efficiency and reducing cost in the pre‐qualification (PQ) process.

Construction Product Availability Statement May 2022

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.

Interest Rates up, but Economy potentially down in 2023

Interest Rates up, but Economy potentially down in 2023

Monetary Policy Summary, May 2022

The MPC voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points, to 1%.

Commenting on the increase FIS CEO Iain McIlwee stated:

“It is clear that the bank needs to act as inflation is well above the 2% threshold and if you look behind the numbers, those 3 members that were not in the majority actually favoured a higher increase, that is to push the Rate by 0.5 percentage points, to 1.25%.  Clearly this is a difficult balancing act, but whilst rates rising is not typically good news for construction, inflation is the bigger challenge and in terms of volumes we should not be too concerned as this increase was anticipated an is already factored in to much of the investment out there.”

Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth. These developments have exacerbated greatly the combination of adverse supply shocks that the United Kingdom and other countries continue to face. Concerns about further supply chain disruption have also risen, both due to Russia’s invasion of Ukraine and to Covid-19 developments in China.

UK GDP is estimated to have risen by 0.9% in 2022 Q1, stronger than expected in the February Monetary Policy Report. The unemployment rate fell to 3.8% in the three months to February, and is likely to fall slightly further in coming months, consistent with a continuing tightening in the labour market and with a margin of excess demand at present. Surveys of business activity have generally remained strong. There have, however, been signs from indicators of retail spending and consumer confidence that the squeeze on real disposable incomes is starting to weigh on the household sector. The level of GDP is expected to be broadly unchanged in Q2.

Twelve-month CPI inflation rose to 7.0% in March, around 1 percentage point higher than expected in the February Report. The strength of inflation relative to the 2% target mainly reflects previous large increases in global energy and tradable goods prices, the latter of which is due to the shift in global demand towards durable goods and to supply chain disruptions.

FIS Members can access the latest construction forecasts from the economics team at the Construction Products Association here 

The Committee’s updated central projections for activity and inflation are set out in the accompanying May Monetary Policy Report. The projections are conditioned on a market-implied path for Bank Rate that rises to around 2½% by mid-2023, before falling to 2% at the end of the forecast period. Fiscal policy is assumed to evolve in line with announced Government policies. Wholesale energy prices are assumed to follow their respective futures curves for the first six months of the projections and remain constant beyond that, in contrast to futures curves, which are downward sloping over coming years. There are material risks around this assumption.

In the May Report central projection, CPI inflation is expected to rise further over the remainder of the year, to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4. The majority of that further increase reflects higher household energy prices following the large rise in the Ofgem price cap in April and projected additional large increase in October. The price cap mechanism means that it takes some time for increases in wholesale gas and electricity prices, and their respective futures curves, to be reflected in retail energy prices. Given the operation of the price cap, consumer price inflation is likely to peak later in the United Kingdom than in many other economies, and may therefore fall back later. The expected rise in CPI inflation also reflects higher food, core goods and services prices.

Underlying nominal earnings growth has risen by more than projected in the February Report and is expected to strengthen in coming months, given the further tightening of the labour market and some upward pressure from higher price inflation. Companies generally expect to increase their selling prices strongly in the near term, following the sharp rises in their costs, with many reporting confidence that they will be able to rebuild at least some of their margins.

Nonetheless, in the May Report central projection, UK GDP growth is expected to slow sharply over the first half of the forecast period. That predominantly reflects the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins. Although the unemployment rate is likely to fall slightly further in the near term, it is expected to rise to 5½% in three years’ time given the sharp slowdown in demand growth. Excess supply builds to 2¼% by the end of the forecast period.

For more market insights from the FIS click here


Construction activity buoyant, but strong headwinds coming, warns Construction Products Association

Construction activity buoyant, but strong headwinds coming, warns Construction Products Association

In its latest quarterly forecast, the Construction Products Association (CPA) sees a dramatic slowing in growth, with uncertainty ahead as global issues start to affect the UK market.

In previous years, the predicted 2.8% growth in construction output anticipated by the CPA team would be cause for celebration. However, while a robust figure, this is a sharp revision down from the 4.3% growth forecast just three months ago.

Demand remains strong across the industry in Q2, and the current project pipeline suggests that this will support activity levels until at least 2022 Q3. The downward revision to the growth forecast stems from concern around a host of price pressures arising from both local and global issues.

Prior to the conflict in Ukraine, UK construction was already facing labour and product availability issues and the impact of reverse charge VAT and IR35. Rising energy costs were driving near-record price increases in construction products and the continued conflict is exacerbating this issue.

The impact of these pressures, and of more general rising costs, on demand will vary considerably by sector. Across the board the picture is one of positive market conditions in the short term with anticipation of tougher times ahead.

In private housing repair, maintenance and improvement, the stellar performer post the initial Covid-19 lockdowns, SMEs report that demand remains high, but this is the sector arguably most exposed to current price inflation, falls in consumer confidence and pressures on household incomes. Overall, output is expected to fall by 3% in 2022 and 4% next year from current all-time highs.

Private housing, the largest construction sector, remains strong, with housebuilders reporting resilient demand. Longer term, there must be questions over consumer confidence but output in this sector is forecast to rise by 1% in both 2022 and 2023. This contrasts with the 3% per year growth forecast three months ago.

The fastest growth is expected in the industrial sector, in which output is forecast to rise by 9.8% in 2022 and 9.3% in 2023, due to a strong pipeline of warehouse projects, resulting from a long-term shift towards online shopping.

Infrastructure, traditionally less affected by immediate economic conditions, remains positive. Large projects such as HS2, Thames Tideway and Hinkley Point C combined with the five-year spending plans in Page 2 of 3 regulated sectors such as rail, road and power generation point to a forecasted growth of 8.8% in 2022 and 4.6% in 2023.

On the supply side, the main immediate impact of the war in Ukraine for construction products will be the knock-on from rising energy prices and commodity shortages. Soaring energy costs will have to be passed on and lead to sharp rises in the cost of energy-intensive products. This will affect both imported products such as aluminium and steel and locally sourced products such as bricks and cement.

Contractors are likely to feel the pressure first, particularly those working to fixed-price contracts. For future projects, contractors will be forced to re-price, add fluctuation costs and introduce risk-sharing arrangements to deal with the uncertainty over potential cost inflation.

Noble Francis, CPA Economics Director, offered this summary of the latest figures:

“The major challenge is creeping uncertainty. The immediate picture is one of resilient demand and healthy pipelines. Longer term, the current inflationary pressures, if sustained, will have an increasingly depressing impact, while the continuation, or potential escalation, of conflict in Europe presents an existential risk.

“Specialist sub-contractors are feeling the effects first, particularly those working to fixed-price contracts. For future projects, contractors will be forced to re-price, add fluctuation clauses and introduce risk[1]sharing arrangement to deal with the uncertainty over potential cost inflation.”

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CICV tells construction clients that rise in project costs reflects ongoing global turmoil

CICV tells construction clients that rise in project costs reflects ongoing global turmoil

The Construction Industry Collective Voice (CICV) has reassured clients that ongoing price rises for projects are caused by global events not “profiteering” – and says any increases only reflect the spiralling costs that are affecting the whole construction industry.

Clients have voiced concerns at the increasing costs of construction work, but the body insists this is due only to ongoing global events sparking a rise in fuel costs and shortages of raw materials and labour.

Iain McIlwee, FIS Chief Executive said:

“The war in Ukraine, energy price hikes, impact of Brexit and fallout from COVID-19 have all created a ‘perfect storm’ just as there is a surge in demand, with price increases being imposed on the industry as a result.

Construction professionals are increasingly being forced to shoulder these ongoing rises, particularly when it comes materials, and are having no option but to pass these increases on to clients. But it is not profiteering – it is a necessity for these businesses to survive.”

The CICV’s Post-Brexit & Trade sub-group this week discussed the higher costs for raw materials, energy, labour and transport being faced by construction businesses of all sizes in Scotland, with particular focus on inflationary pressures for SMEs caused by external factors.

Iain added:

“This is a really challenging time for all in the construction supply chain with costs rising, often at short notice.  The critical thing now is that we work together as a supply chain.

Too often in construction we have contracted down all risks, but we are now in a position where fixed prices could undermine the resilience of contractors or suppliers and we need to adopt a more collaborative approach and consider how fluctuations clauses can be deployed and any risks fairly shared so as not to undermine the quality or viability of a project or businesses.”

The CICV says as well as the negative impact of political, military and health issues, the withdrawal of red diesel in April has also led to higher costs for construction firms.

Chris Cassley, Policy Manager at CICV member the Construction Plant-hire Association (CPA), said:

“The UK Government’s environmental strategy with the removal of red diesel for construction plant has undoubtedly contributed to the current financial impact on industry, and despite representations to government departments, has proceeded regardless.

“The rise in energy and material prices, together with supply chain pressures and higher inflationary figures, has led to a tipping-balance for suppliers and customers alike, and in many instances resulted in necessary price increases. These increases are very likely to be passed back up to the client and for government projects, it will be the taxpayer who will ultimately have to pay.”

Another warning came from Andrew Richards, Strategic Director of Safedem and a member of the Construction Scotland Industry Leadership Group, (representing SMEs and the supply chain) which is working in tandem with CICV to support the industry. Mr Richards said:

“The knock-on effects caused by the global events of the past two years looks like they will continue for the immediate future, so clients should consider fluctuations and rises in construction costs as part of ‘the new normal’ and shouldn’t expect prices to fall any time soon.

“Construction professionals are equally concerned about the uncertainty that surrounds the marketplace and are only passing on cost increases through necessity, not greed.”

The Post-Brexit & Trade panel is one of 12 sub-groups run by the CICV, covering a range of issues ranging from health and safety and skills to the supply chain and project bank accounts.

The collective was rebranded from the Construction Industry Coronavirus (CICV) Forum at the start of 2022 to reflect its widened remit, which now covers all areas of construction.

Since its creation in March 2020, the CICV has drawn on the collective expertise of its members to maintain a steady supply of information and practical advice to the sector as well as carrying out surveys, hosting webinars and making appeals to government ministers.

The impact of the war in Ukraine is only beginning to be felt by UK construction

The impact of the war in Ukraine is only beginning to be felt by UK construction

The impact of war in Ukraine: The Government has announced new measures to support Ukraine under its free trade agreement, which include reducing all tariffs on goods imported to zero and removing all quotas. It has also strengthened sanctions against Russia, with tariffs increased by up to 35 percentage points and the list of products facing import bans expanded to include silver and wood products.

The latest statement issued by the CLC Product Availability Group confirms that ‘the impact of the war in Ukraine is only beginning to be felt by UK construction’. Sanctions against Russia have led to reports of nickel prices doubling, which affects the price of stainless steel, whilst rising energy and raw material costs are continuing to drive up prices, particularly for energy‐intensive products like steel, cement and glass.