208 construction firms went into administration in 2022 [1]. This is a 56% increase on the figures from 2021 and has been attributed to inflation manifesting in the costs of borrowing, energy, fuel and raw materials. This is a concerning trend and one which could have significant ramifications for the industry if left unchecked.

In this post, we will explore the root causes of the inflationary pressures that are challenging our industry, consider the potential consequences and propose what we feel are the most realistic solutions available to mitigate the crisis and deliver long-term sustainability.

Root Causes

1. Increased cost of borrowing. 

Many construction firms, particularly small to medium sized enterprises and those that are recently established, will use loans and other forms of finance to help them achieve economies of scale, fund their initial projects prior to receiving payment and to maintain their business' reputation. Unfortunately, rising interest rates mean that repaying these loans is now considerably more expensive than it was when they were first arranged, and failing to repay is not an option.

2. Costly energy rates.

Approximately 3% of the UK's total energy usage is attributed to the construction industry [2], and as energy rates rise, so too does the financial burden on already cash-strapped construction firms. Additionally, there is no energy price cap on business energy costs, so with fewer energy companies offering competitive deals, construction firms are forced to continue to pay the going rate for the energy that they require.

3. Increased cost of fuel.

Heavy machinery used on construction sites requires fuel to operate and when the cost of fuel increases as dramatically as it has over recent years, this takes a significant toll on the bottom line. To add insult to injury, rising fuel costs are said to be the reason for a wave of fuel thefts from unattended construction machinery, and when this happens, it can decimate profit margins. 

4. Rising cost of raw materials. 

Steel, timber and concrete have significantly increased in cost over the last few years which has a profound effect on construction project budgets. This is compounded by clients wanting more for less, as their budgets are likewise squeezed and they are required to demonstrate that they are delivering value for money.

5. Personnel costs.

A shortage of skilled construction staff has led to many construction firms offering salary increases and bonuses to try to resolve their staffing issues and enable them to deliver the workload that is required to turn a profit. 

6. Regulatory compliance.

The regulatory burden to which the construction industry must adhere continues to evolve and be tightened to address safety concerns and to promote the UK government's sustainability agenda. Adhering to these new regulations imposes added expense on already stretched construction firm budgets which exacerbates the inflationary burden that they are facing.

Potential consequences

1. Increased rate of bankruptcies.

If inflationary pressures continue to mount unchecked, it is very likely that the percentage of construction firms entering administration will increase as they are unable to adapt to the increased financial strain. This is particularly true of those that have loans or equipment secured on finance deals who will see real-time shrinkage in their profit margins, leading to financial instability and, potentially, bankruptcy.

2. Project quality and time failures. 

If clients constrain construction budgets to unachievable levels, it is likely that the quality of build projects will suffer, impacting client satisfaction, or that time scales will extend as cheaper, less skilled labour is employed to satisfy the client's requirements and to remain within budget.

Proposed Solutions

It is very hard to propose solutions that don't include increasing costs to compensate for inflationary pressures. Clearly, this is a discussion that must be had with clients where other areas for cutting costs have been investigated and discounted.

There are some fundamental areas that should be investigated. These include implementing sustainable construction practices, including the reduction of material waste and embracing modern methods of construction such as off-site modular construction and Building Information Modelling.

Developing a strong and resilient workforce will be essential for the success of construction firms, and collaborating with schools and colleges, offering graduate opportunities and apprenticeships is one way in which future generations can be encouraged into a career in construction, alleviating labour shortages and welcoming in a new tranche of talent.

In conclusion

It seems unlikely that the inflationary pressures that our industry is facing will recede by themselves and construction firms wishing to remain competitive into the future will need to take proactive measures to secure their position within the marketplace. This will involve cautious and targeted cost cutting measures, coupled with client expectation management and a firm focus on long-term sustainability.

Resources:

[1] https://www.pbctoday.co.uk/news/planning-construction-news/construction-industry-accounted-for-16-of-administrations-in-2022-survey-reveals/121416/#:~:text=A%20survey%20from%20Shakespeare%20Martineau,56%25%20increase%20compared%20to%202021. 
[2] https://rg-group.co.uk/whitepaper/impact-of-rising-energy-costs-in-construction/#:~:text=The%20construction%20industry%20is%20a,big%20impact%20on%20the%20sector.