Slowly but surely the UK is starting to open up after a long sixteen months of lockdowns and restrictions. With the UK no longer a part of the European Union as of 31 January 2020, the country had only a few months to process post-Brexit life before being faced with a global pandemic.
Brexit and COVID-19 have seriously impacted many sectors within the UK, but how has this affected the construction industry in particular?
The construction industry has been at the forefront of the government’s economic recovery plan with activity levels at their highest in the past seven years. Soaring demand has strained the availability of a number of key materials with some materials experiencing double-digit inflation. This issue has been exacerbated due to the limited imports of products from the EU due to the new non-tariff barriers and the strain of many manufacturing companies having to close their doors during the pandemic. The demand for these products has simply excelled quicker than the supply.
Material shortages
Material shortages is currently a huge issue for businesses in the construction industry. The Construction Leadership Council product availability statement commented on the worst affected products.
Timber is one such product where stock levels are declining due to high international demand, which has prevented UK-based buyers from rebuilding their stock since the beginning of the pandemic. Demand has skyrocketed in the UK as contractors try to catch up on the developments that were slow to start due to lockdowns.
The demand for steel has also soared as companies rushed to complete projects that were forced to halt during the pandemic. This has resulted in the price of fabricated structural steel rising 17.6% than the previous year. The shortage of steel hasn’t just affected production in the UK; it has created a worldwide shortage.
Cement is another material that has faced shortages over the last year however, supply has improved and is now broadly back to normal. The quick increase in supply has been put down to the product being produced within the UK rather than having to rely on imports from overseas.
Plastic has also faced supply problems, due to the increased global demand and multiple factory closures outside of the UK. Raw material shortages have also limited production of polyethylene and polypropylene plastics, commonly used in the UK for pipe production and the manufacturing of roof membranes.
Family-owned / owner-managed businesses
The shortage of materials affects all businesses within the construction industry; however, it especially creates problems for small and medium sized family-owned / owner-managed businesses. Due to their limited resources, such businesses are often unable to stock-pile materials (unlike larger businesses). This means that such businesses may not have the materials needed to complete projects pursuant to their contractual obligations thus adversely impacting cash flow. Cash is king to all businesses; however, it is particularly important for SMEs with less capital assets and which depend on regular income to stay afloat.
In addition, material shortages causing a surge in material prices adversely discriminates such businesses as most contracts with businesses of this size do not contain fluctuation clauses.
Fluctuation clauses in construction contracts provide a mechanism for dealing with the effects of inflation, which on large projects lasting several years can be very significant. These clauses allow the contract sum to be adjusted to take account of changes to the price of labour, materials and other costs throughout the life of a project.
The inclusion of such clauses would obviously prove to be beneficial to contractors as they allow contractors to inflate the contract price so as to accommodate the increase in the price of materials. If the contract did not contain a fluctuation clause, the contractor would not be able to adjust the contract price and would only be able to charge the client the price agreed pre-COVID-19 and pre-Brexit, for the cost of the materials; thus, significantly affecting profit margins.
This is unfortunately a major issue that smaller family-owned / owner-managed businesses are grappling with. Commonly, their contracts do not contain fluctuation clauses and so they are stuck with the prices they negotiated 12 months ago, which did not accommodate the inflation now prevalent in the industry.
It is a sad eventuality that many businesses may collapse in the face of such issues unless supply of necessary materials can meet the demand and fluctuating prices can be accommodated in contracts.
In addition, the shortage of materials in the UK may be exacerbated come 1 January 2022 as the UK is set to stop recognising the European CE certification of products and instead, products in the UK will need a UKCA marking, which can only be obtained by having the product tested at a UK facility at a great expense. This is likely to add to the already limited supply of materials in the UK and cause further delays to projects.
A key takeaway from all of this is to ensure that your contracts are properly negotiated to include fluctuation provisions to mitigate some of the effects of these issues. Whilst at first blush this might seem only relevant to contractors, it’s sensible for employers to also consider including such provisions to avoid the risk of major delays to projects caused by problems in the supply chain concerning the unavailability of and inflation in the price of materials. Please don’t hesitate to get in touch with a member of the Construction or Family Business team at Brabners to discuss how we can assist you with any of the issues covered in this article.
