Weaker pound aggravates rising construction costs

We explore the consequences of a spluttering sterling for the construction industry across England, Scotland, Wales and Northern Ireland.

The FMB’s State of Trade Survey results for Q2 2016 shows that two-thirds of construction SME bosses expect material price inflation.

“Even prior to the referendum result, nearly two in three bosses were anticipating rising material costs, on which there has been intense pressure over the past couple of years, as demand for projects has picked up again,” said Brian Berry, Chief Executive of the FMB.

“With the dramatic fall in currency value however, we’re concerned that the trend towards price inflation will gather pace. We’ve already heard accounts of timber and brick costs rising, and a number of sources have said that even steel prices have risen by 8% since the decision was made to leave the EU.”

A chronic skills shortage continues to put upwards pressure on salaries and wages, driving costs further skyward for SMEs.

According to Berry, too many SMEs are already operating on razor-thin margins and are forced to tender at prices which barely return a profit in order to remain competitive. This leaves little capacity to absorb dramatic price increases.

A weaker sterling could also drive up the costs of materials and tempt Northern Irish firms to pursue more work south of the border.

“Northern Irish SMEs continued to build up a head of steam in the run-up to the EU referendum, demonstrating that after years of difficult trading conditions, things were beginning to look more positive,” said Gavin McGuire, Director of FMB NI Workloads.

“However, enquiries for new work began to decline prior to the referendum, which reflects that UK-wide uncertainty over the result was leading to investment decisions being stalled – given the outcome, this uncertainty is unlikely to dissipate any time soon,” added McGuire. “Northern Irish firms are working their way up from a low base, so this is cause for concern – they cannot afford another prolonged downturn.”

According to McGuire, the ailing sterling could have profound consequences for Northern Irish firms. “It will make working south of the border, where the revival in construction industry is much more pronounced, even more tempting,” said McGuire. “We’ve consistently warned the NI Executive that this trend is tantamount to a skills drain and makes the need for Government intervention all the more crucial, especially in light of the news that the UK construction sector is now in recession.”

Workloads for Welsh construction SMEs increased in the second quarter of 2016, but enquiries declined in the buildup to the referendum. Ifan Glyn, Director of FMB Cymru, said, “Seven out of eight of the last quarters have been positive, reflecting increased confidence among businesses and consumers alike. However, a declining number of enquiries in the buildup to the referendum is ominous, and we must hope this was only a dip and not a bad omen.”

Wales has been a net beneficiary from EU structural funding and the loss of this investment is a concern for construction bosses, who might directly rely on this work or operate as part of the supply chain.

“The suggestion from the Secretary of State for Wales that this funding will not be replaced is alarming and makes it all the more important that the Welsh Executive acts as a champion of the construction sector,” said Glyn.

“We’ve been encouraged by the messages coming from our Welsh ministers, but it’s critical that the key housing and infrastructure plans for the country – so crucial to our future prosperity – are delivered as intended, he added.”

Scottish construction SMEs boomed during the second quarter of 2016, but there are real concerns regarding the potential impact of Brexit on the Scottish construction industry.

“Prior to the EU referendum, Scottish building firms were feeling bullish about their prospects and these results – the most positive since 2007 – reveal the momentum they were developing in the first half of 2016,” said Gordon Nelson, Director of FMB Scotland. “However, the referendum result was not widely foreseen and will undoubtedly impact upon business and consumer sentiment over the second half of this year.”

Survey findings showed that public sector workloads for small construction firms continued to decline.

“The Scottish Government has spent heavily on housing and infrastructure over the past few years, yet this hasn’t filtered through enough to SMEs,” said Nelson.

“What we need is a renewed focus on improving public procurement processes for smaller firms so that they can benefit from these public spending opportunities.”