Recently, severe supply constraints and escalating costs have been two of the most prominent trends in the UK construction sector.
Output levels and new order volumes across the sector rebounded from the lockdown lows of Q2 2020, with the easing of COVID-19 restrictions. However, contractors continued to report widespread and intensifying material and labour supply limitations as Q3 2021 came to a close. These constraints have disrupted work on site for an extended period. If they persist beyond the near term, they may threaten to destabilise the sector’s ensuing recovery.
The 1.5% reduction in construction output in Q3 2021 represents the first quarter-on-quarter contraction since the Q2 2020 low (-35.6%) and puts Q3 2021 output 0.3% down when compared with Q1 2020, the last quarter of mostly normal training conditions pre-pandemic. This demonstrates the fragility of the sector’s post-pandemic revival.
Supply chain issues, which have resulted in rapidly increasing purchase costs, have prevented contractors from accelerating ongoing developments and clearing a backlog. They have also hindered contract negotiations in spite of stronger underlying demand and squeezed the short- to medium-term profit margins of builders with fixed-price contracts.
According to provisional data from the Department for Business, Energy and Industrial Strategy, construction material prices in the United Kingdom were up 9.4% on a quarterly basis in Q3 2021. Additionally, relative to pre-pandemic levels in Q1 2020, prices were up 23.1%.
Commenting on the optimism among contractors that ‘the next 12 months will be rosier’, the Group Director at the Chartered Institute of Procurement and Supply (CIPS) warned recent supply chain pressures across the construction sector imply it is ‘far from guaranteed that uncertainty and instability are behind us just yet’.
Construction output
Focusing on volume output, analysis of Office for National Statistics (ONS) data revealed infrastructure construction was the only primary new work sector where output levels increased in Q3 2021, by 10%. This moderated the contraction in overall construction output (-1.5%), which was driven by apparent reductions across other new non-residential construction (-4.9%), housebuilding (-3.5%), and repair and maintenance markets (-3.6%).
Anecdotal evidence by the ONS has suggested the outperformance of infrastructure construction activity was the product of ongoing projects and key developments elsewhere, with motorway improvements and green energy developments explicitly mentioned.
Explaining the Q3 2021 falls in output across the construction sector, excluding infrastructure, evidence from the ONS’s Business Insights and Conditions Survey (BICS) for October 2021 revealed 10% of active construction businesses were unable to source materials, goods and services required from within the United Kingdom in the preceding month. Only 25% were able to get the supplies they needed, albeit by having to change suppliers or find alternative solutions, presumably at a greater cost.
The ONS BICS found the construction sector to be the highest of any UK sector reporting supplier issues.
This not only provides evidence that the lack of available inputs were why overall construction output dropped, but also corresponds with exponential growth in construction material prices, by way of extended lead times throughout the upstream.
New orders
After a strong first half in 2021, new orders contracted by 9.2% on a quarterly basis in Q3 2021. This saw volumes fall back below the Q1 2020 benchmark, a period in which domestic markets were mostly absent of pandemic-related disruptions.
The overall decline was led by a quarterly reduction in new orders for both infrastructure construction (-25.5%) and other non-residential construction (-11.9%). However, with regards to the former, this trend is not necessarily associated with the timing and nature of new orders, as critical infrastructure investment is more dictated by the immediate needs of society rather than by cyclical or seasonal patterns.
Prior to Q3 2021, new orders for overall construction had increased by a double-figure percentage for two consecutive quarters through Q2 2021. This momentarily pushed volumes above the pre-pandemic level and to their highest quarterly level since Q3 2017. The expansion in new order volumes at the start of 2021 was driven by the easing of COVID-19 restrictions and the consequent release of pent-up demand.
Yet, to the detriment of contractors’ forward-looking order books, a volatile price and supply environment ignited a new wave of business uncertainty, thus impeding contract negotiations. As a result, overall new order growth was pressured in Q3 2021, as increasing lead times throughout the upstream made assurance to contracted projects challenging due to the unpredictability of materials and other supplies arriving on site, on time. According to CIPS, such an occurrence was reported by over half of all UK construction supply chain managers surveyed in September 2021.
Not all areas of the construction sector reported a quarterly contraction in business enquires, as new orders for housebuilding continued on a path of steady recovery.
New orders for housebuilding expanded for a fifth consecutive quarter in Q3 2021 and ended the quarter at a volume that had not been higher since Q1 2018. While, like all construction sub-sectors, materials and labour shortages continue to hinder the Residential Building Construction industry and threaten to constrain new orders, the long-term imbalance between housing stock and housing demand has ensured the appetite to build residential real estate has remained.
Supply chain issues
The construction sector has, in effect, become a victim of its own success. By success, what is being referenced is the construction sector’s sharp, post-lockdown recovery. The effect of supply chain disruption is no longer limited to simply causing delays to in-motion projects, resulting an intermittent lull in output.
Supply chain problems are now causing the rate of new orders lose momentum and, in many instances, decline.
Reacting to a slowdown in new business enquires reported across the construction sector, the director of real estate consultancy Naismiths noted ‘soaring prices of key building materials, not to mention patchy availability and lengthy delays, have forced some construction firms to admit to clients that they simply cannot keep up with demand for building projects’.
Underlying demand for construction has resurged at a significant rate; however, many supply-side risks and uncertainties have simultaneously intensified. This has seen contractors succumb to a ‘perfect storm’, where supply chain delays and soaring prices are preventing the industry from taking on new work, at a time when the economy is bouncing back and firms are eager to capitalise.
The construction sector’s Q3 2021 results look good when compared with the Q2 2020 lockdown, the supply-versus-demand worries that have crept in, and look set to stay for at least the near term, make for a nervy Q4 and may instil doubts over 2022 boom contractors were hoping for in 2022.
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