top of page
  • Writer's pictureInvestment Synergy Team

Brickies go to the wall as price rises sweep construction sector

August 7 2022, The Sunday Times - Jon Yeomans

Soaring costs are forcing companies to work at a loss....

In an office in Plymouth, Ross Dent is trying to price up a double-glazing job. It should be simple enough; after all, he has been running his firm, Sunrise Windows, for 27 years. But the prices he is being given by suppliers keep running away from him. “I was quoted £1,500 for some galvanised steel, and my supplier said he could hold the price for only seven days,” said Dent, 64. “We can’t run our business like this.”

Most of the time, the solution for Sunrise Windows, and many others, is to pass on the costs to customers. But on bigger projects, which take months to complete, companies are locked into contracts agreed before inflation gripped the nation. “Builders are pricing at one figure and buying materials two months later at another that will have jumped significantly,” Dent explained.

Firms that cannot wriggle out of contracts find themselves caught in a cash crunch. The strain is showing at the sharp end. Insolvencies in construction in England and Wales are running at 350 a month, compared to about 269 a month in 2019, according to the Insolvency Service. Figures last week revealed that voluntary liquidations across all sectors had reached their highest quarterly level since 1960.

In construction specifically, restructuring experts are reporting more firms seeking their help. The sprawling industry, which employs more than two million people, looks like a canary in the coalmine for the wider economy. Output in the sector shrank in July for the first time in a year and a half, according to a survey by S&P Global last week.

Construction is exposed to the price of materials, which shot up last year on the back of Covid-related supply-chain disruption. To make matters worse, pandemic support for businesses has ended.

Toby Banfield, a director in PwC’s restructuring arm, said: “I’ve been doing restructuring for 14 years and the past year has been more focused on construction than any other time in my career.”

He is helping firms reduce costs by consolidating buying operations and selling off divisions. There has also been a rise in companies using company voluntary arrangements (CVAs), which allow them to renegotiate unprofitable contracts.

There are even reports of firms taking on jobs that will lose them money just to keep a pipeline of work going — the type of behaviour that was the undoing of Carillion, which collapsed in 2018.

“Some firms will pitch the projects at below cost, and then try to beat the clients up to get extras to break even,” said Mike Lloyd, managing director of London-based LTC Scaffolding.

Dog eat dog

In such a febrile atmosphere, it is not unusual for firms to squeeze their suppliers to protect margins. “Everybody is blaming everyone else. Since we’ve come back from Covid it’s been almost open warfare between suppliers and SMEs,” said Dent. “I’m sure there’s a certain amount of profiteering going on.”

Adding to the pressure is a chronic worker shortage. Vacancies in the sector ran at 44,000 in the second quarter of the year, according to the ONS, with some builders complaining that the industry has never recovered from the exodus of European workers after Brexit. A significant number may have taken early retirement after Covid.

Roni Savage, founder of site surveyor Jomas Associates, is working hard to entice a more diverse workforce into a traditionally male industry. She recently spoke to primary school children. “We have to encourage them to look at construction as an industry that will give them a rewarding career,” she said.

Such efforts will not pay off for a decade or more. In the short term, firms are throwing cash at the problem. There are reports of wages for unskilled labour jumping to £180 a day, from £90 before the pandemic.

After a pause at the outset, building continued through the pandemic. Profits at the big FTSE builders hit £4.1 billion last year, the highest since 2018. Last week, Taylor Wimpey said its profits would be at the top of expectations. Boss Jennie Daly said “the housing market continues to be very resilient”.

This is despite complaints that the boxy new-builds churned out by the big players are not up to scratch. A report co-authored by University College London in 2020 declared most new-builds were of “mediocre” or “poor” design. The government created a New Homes Ombudsman to address complaints.

“There are some bad actors selling shoddy homes,” said John Myers, of Yimby Alliance, a group that lobbies for more housing. “But the housebuilders are just responding to what the system is encouraging them to do. Developers are going to squeeze the last bit of profit at the expense of what might be better for the community, or better design.”

SME pain

At the other end of the spectrum, it is a different story. “The big boys are making substantial profits, but that does not apply to SMEs,” said Paul Pedley, chief executive of Cheshire-based Archway Homes and a former boss of listed builder Redrow.

Smaller builders grumble about a gummed-up planning system and new rules to boost home energy efficiency, which came into force in June, with more to come in 2025. Ministers want builders to set aside a space on plots for rewilding to boost biodiversity. And tough new rules on water pollution mean 74 local authorities have frozen developments. The Home Builders Federation reckons this has put 100,000 houses on hold.

The upshot is that lower-end homes are becoming too expensive to build, according to Mark Shouler, chief executive of Hofton & Son in Nottingham. “I think that we could be in for one of the biggest housebuilding problems we’ve ever faced,” he said. “If we can’t make money at it, we’re not going to do it.” His firm is taking on more commercial work, building more “tin sheds”, rather than homes.

Pedley noted that without the support of SMEs, the government would never hit its target of building 300,000 homes a year.

A shakeout in the sector seems certain. Andrew Davies, of Kier Group, told analysts in May: “We are seeing certain projects being reappraised and delayed due to cost pressures.”

Yet there are signs more fleet-footed firms are learning to adapt. Some companies are pushing customers to accept contracts that allow them to reprice their jobs if costs soar. “We’re saying to our clients, there must be an opportunity to readjust our prices,” said Lloyd of LTC.

Others are piling into public sector work, where contracts can still be won. And there is a sense that high prices might ultimately correct themselves, if clients simply put projects on hold.

Back in Plymouth, Dent fears customers will be scared off if he raises prices. “People are balking at some prices. It’ll get to a point where it will get overly expensive,” he said. “Everybody says it’s going to be temporary, but in this industry, prices never come down.”

Investment Synergy - Perfect storm issues... Brexit = lack of workers. Pandemic = supply chain delays. Energy efficiency & green initiatives = delays in planning approvals. Rising costs = challenges for the smaller companies, quality of housing built Total = a dearth of affordable, socially acceptable housing options.

32 views0 comments


bottom of page