Previously, the Monetary Policy Committee (MPC) projected that inflation would peak in April and start to ease shortly afterwards. However, with the recent outbreak of the Russia-Ukraine conflict it is difficult to see how inflation will return to more normal levels. It is likely that consumers and businesses will see no respite from rising inflation in the coming months.
With Russia facing severe sanctions such as the pause of the certification of the Nord Stream 2, the markets have reacted with soaring energy and commodity prices in response to supply concerns. However, this is no surprise seeing as Russia supplies almost a 1/3 of Europe’s energy resources and is also a key player in commodity markets such as aluminium, titanium and nickel.
The construction industry which has already seen record levels of price growth in both input and output prices over the last 12-months, will see even further price hikes due to the conflict. And as inflation plays a vital role in the prices of materials, labour and machinery; contractors will see increases in the final costs of their projects. Contractors are likely to pass some of these additional costs to the end consumer. For example, British Steel, a key supplier of steel to the industry previously added a temporary £30 surcharge per tonne of steel to cover increasing costs during the peak of the pandemic. Although, it is unlikely that all additional costs can be passed on, as many construction contractors are bound to fixed-price contracts.
The Department for Business, Energy & Industrial Strategy’s (BEIS) latest update shows that the 12-month material price index for December 2021 saw an overall increase of 21.5% versus last year. Particle board, fabricated steel and concrete reinforcing bars seeing the biggest price increases of 50-60%. Although, as market demand normalises and countries such as India and China ramp up production capacity of construction materials, we should expect at least a slight easing of prices.
Prior to the Russia-Ukraine conflict, mounting cost pressures had already crippled the sector. The 3-months to December 2021 saw an average of 289 construction business insolvencies compared to an average of just 142 versus 3-months to December 2020. Therefore, it is important for businesses to act now to manage costs which will only continue to increase as the conflict rages on.
A few things contractors may want to consider are:
- Agreeing cost-plus projects instead of fixed cost, allowing costs to be passed onto the consumer.
- Sourcing of cheaper substitutes. For example, instead of using steel, can savings be made by trialling timber or concrete.
- Reviewing trading agreements with existing suppliers. Are there better deals to be had on the market?
- Does your supplier anticipate any further price increases? This will allow contractors to factor in these price increases into forecasts and significantly improve cost management.
- Is there scope to join a buyer’s group, which will allow greater purchasing power.
- Consulting specialists – for example, sourcing local materials and labour for projects may ease costs.
The surge in energy prices triggered by the Russia-Ukraine conflict will drive inflation beyond eight per cent, generating the worst squeeze on household living standards since the second world war.