The reality for construction companies doesn’t look bright when it comes to construction material costs. Under current circumstances, purchasing construction materials is now considered unmanageable. Why? Costs have skyrocketed in the past few months.
Extremely high energy and gas bills, food prices rising, fuel costs jumping and the UK cost of living crisis. It leaves little room for optimism. Inflation takes most of the blame, but we cannot ignore other factors.
The world is currently dealing with inflation consequences. But what does inflation mean? The rate of inflation in economics refers to the change in prices for goods and services over time. When the general price level rises, one can buy fewer products with a unit of currency. As a result, the purchasing power of money is being reduced.
Let's look at why inflation has surged to its highest level in 30 years.
Nearly 4 months into the conflict and adequate sanctions on Russia, we can already notice its impact on the world’s economy: oil prices have reached $120 a barrel by mid-April, which has doubled compared to last year. According to the Financial Times, if the European Union decides to ban all oil imports from Russia, Chancellor Rishi Sunak estimates the war will cost the UK economy roughly £70 billion.
Yes, the two-year-long stagnation caused by Covid is still one of the main reasons for world-wide inflation. According to Craig Kirsner, President of Stuart Estate Planning Wealth Advisors in Coconut Creek, Florida: “For the past year and a half due to Covid hardly anyone was spending money. Now that the economy is back open, people are spending and traveling and, as such, there is a bottleneck with very high demand. Our system isn’t set up for this high demand level, so that causes inflation in the short term”.
Almost six years after the Brexit referendum and the construction industry still feels the consequences of leaving the EU. Britain imports up to 22% of its materials, with 60% coming from EU countries. Slow and painful custom checks, along with many other issues, have slowed the supply chain down and increased costs.
The inflation rise is a direct cause of construction material cost hikes. Higher inflation leads to pricier construction products.
Where can we see the most sweeping changes regarding product pricing? The Construction Alliance North East (CAN) shares that the steel going up by £250 a ton represents a 10% overnight increase for the group’s members.
The impact on the construction industry is enormous. CAN’s regional SME members have been impacted greatly. For example, on two relatively small projects this resulted in an immediate cost increase of circa £20,000 per project and the member company is currently unable to pass this on to clients due to fixed-price contracts.
- Ken Parkin, Chair of CAN
Given the circumstances, it is crucial that everyone involved in the process - material suppliers, clients and merchants - collaborate with the subcontractors in order to share the risks.
Material cost hikes mostly affect small to medium sized businesses without the financial bandwidth to absorb these increases. This leads to new challenges... As a result of material supply constraints and commodity price increases, these companies are up against:
Loss of Cash Flow
Extended Lead-in Times
Project Delivery Delays
Total Project Costs Increase
The truth of the matter is that the construction industry has had to put up with rising prices and inflation since 2021 and unfortunately, this phenomenon is going to continue for some time. Even though the situation is troublesome for construction businesses, there are a few steps you could take within your own company that will help reduce the drastic costs as much as possible. Discover them in our other pieces:
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