State of trade: rising workloads and costs

Small construction firms enjoyed rising workloads in the first quarter of 2017, despite growing concerns over the cost of labour and materials, according to the Federation of Master Builders (FMB).

Key results from the FMB’s State of Trade Survey for Q1 2017, which is the largest quarterly assessment of the UK-wide SME construction sector, include:

  • Workloads grew markedly in every region and nation of the UK;
  • Scottish construction SMEs reported the highest levels of growth since the financial crisis unfolded in Q4 2007;
  • One in two construction SMEs predict rising workloads in the coming months, with just 5% predicting a decrease in activity;
  • 85% of builders believe that material prices will rise in the next three months;
  • 60% of construction SMEs are struggling to hire bricklayers; 58% are struggling to hire carpenters and joiners; and 45% are struggling to hire plumbers;
  • UK construction SME workloads increased more significantly than at any time since Q2 2016 i.e. the quarter immediately prior to last June’s EU referendum;
  • 58% of firms are struggling to hire carpenters, a post financial crisis high.

In the three months to March 2017, SME workloads showed rising levels of activity. More firms reported higher workloads compared with the previous quarter (35% vs 32%), while fewer businesses reported lower workloads (14% vs 20%).

Brian Berry, Chief Executive of the FMB, said, “Workloads rose in every part of the UK, with particularly positive results in the devolved nations. Given the concerns that wider consumer confidence might be weakening, it’s encouraging that smaller construction firms aren’t sensing any drop-off in demand for their services. Indeed, despite Article 50 being triggered and the growing likelihood of a hard Brexit, these latest results demonstrate that builders are increasingly confident about the immediate future, with one in two forecasting higher workloads during the next quarter.”

Over the next three months, businesses are predicting an increase in activity levels. The share of respondents forecasting higher workloads went up to 50% from 26%. In contrast, firms anticipating lower workloads declined to just 5% from 21% in Q4 2016

The latest regional composite indicators showed activity rising at a faster pace in all four home nations: Scotland saw the greatest increase of 25 percentage points in its net balance, while Northern Ireland experienced the smallest rise of 17 percentage points.

Output prices, wages and salaries and material costs are all predicted to increase over the next six months: The net balance for output prices saw the greatest jump as the share of businesses anticipating price rises grew to 68% from 45%.

In contrast, only 1% of firms project output price deflation, down from 4% registered in the previous quarter.

Employment rose at a faster pace compared with three months earlier: The proportion of businesses reporting that their workforce went up rose to 21% from 18%, while most firms (70%) reported no change in employment.

“The survey covers the period before the announcement of a snap General Election, which may well cool consumer demand in the coming months,” said Berry. “The results are also tempered by a clear rise in output costs for construction companies. Material prices and wages rose markedly in the first three months of this year, with larger numbers of construction SMEs believing that all three will rise further during the next quarter.

“Indeed, although only 20% of construction products and materials used in the UK are imported, the depreciation of sterling since the referendum last June has seen material prices shoot up – with 85% of builders predicting further rises – this pressure on margins looks set to continue. Such cost inflation presents clear challenges to the profitability of smaller building firms and in many cases, builders will be forced to pass these price increases onto their customers.”

Berry concluded, “The combined effects of rising material costs and the ever-worsening construction skills crisis will therefore be reason enough for SME construction firms to be cautious in their optimism. If growth in real household income remains flat, and if consumer confidence is shaken by the impending snap General Election and the triggering of Article 50, there are plenty of potential pitfalls for builders to navigate. Nevertheless, as of yet, the much anticipated ‘Brexit effect’ has yet to hit what is considered to be the bellwether sector of consumer confidence and wider economic health.”

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