Construction SMEs bear the brunt of rising costs

July 31, 2017 / Isla MacFarlane
Construction SMEs bear the brunt of rising costs

Inflation, a depreciating sterling and a shortage of skills have all conspired to send the cost of construction materials soaring – and it’s hitting construction SMEs the hardest.

A third of small building firms say that soaring material prices are squeezing their margins and almost a quarter have had to pass these price increases onto consumers, according to the latest research by the Federation of Master Builders (FMB).

Construction product manufacturers are also suffering with the economy. The Construction Products Association (CPA)’s State of Trade Survey for 2017 Q2 revealed that higher input costs and rising uncertainty has dampened manufacturers’ views for the near-term future.

The strongest inflationary pressures came from raw materials, fuel and energy, owing to depreciation in Sterling during 2016, alongside skills shortages pushing up wage bills.

According to the CPA, among heavy side manufacturers only 7% anticipated a rise in sales in the next quarter, a decline from the 68% who anticipated a rise when asked in 2017 Q1. A sharp rise in input costs was also reported in Q2, with 93% of heavy side manufacturers and all of those on the light side reporting an increase in costs compared with a year earlier.

The FMB asked small building firms were asked which materials have increased the most and the results were as follows:

  • Timber;
  • Insulation;
  • Bricks;
  • Blocks;
  • Windows;
  • Plasterboard / Slate (joint sixth);
  • Boilers and radiators;
  • Porcelain products.

The impact of these material price increases includes:

  • 85% of builders think material price rises could drive consumers to hire rogue traders in an effort to save money on their building projects;
  • One third of construction SMEs (32%) have had their margins squeezed;
  • Almost one quarter (22%) have been forced to pass material price increases onto their clients, making projects more expensive for consumers;
  • More than one-in-ten builders report making losses on their building projects due to material price increases.

Brian Berry, Chief Executive of the FMB, said, “Material price increases have left builders under severe pressure. This research shows that following the fall in the exchange rate, timber is the material that the majority of builders say has increased most in price but the problem doesn’t end there – everything from insulation to windows to bricks and blocks are soaring in price.

“A third of builders report that these price increases are eating into their already razor-thin margins – and this on top of increased wages and salaries stemming from long-term construction skills shortages.

“Furthermore, one-in-ten builders say that they’ve actually made losses on projects due to material price increases – this is most likely to happen when a particular product or material jumps up in price mid-project when then builder has already quoted for the work. Perhaps unwisely, some builders are absorbing these extra costs as opposed to re-quoting for the project.”

According to the CPA’s State of Trade Survey for 2017, 93% of heavy side manufacturers and 90% of light side manufacturers anticipate a rise in costs over the next year.

Rebecca Larkin, CPA Senior Economist said, “Despite healthy growth in the second quarter, construction product manufacturers have turned more pessimistic over performance for the rest of the year, reigniting concern that the triple hit of imported inflation in raw materials, higher fuel and energy prices and the persistent pressure on labour costs will have a negative impact on demand and construction activity over the next 12 months.

“An increase in overall costs was reported by 93% of heavy side manufacturers and all of those on the light side. Inflation is expected to endure as similar proportions anticipate that costs will continue to climb over the next year. Government’s ability to progress the pipeline for large public sector and infrastructure projects is now more important than ever as a means of sustaining activity when private sector decision-making may be stalling.”

New research from Begbies Traynor shows that 329,834 UK companies were experiencing “Significant” financial distress at the end of Q2 2017, a 25% increase from Q2 2016 (263,517 companies), representing the largest annual increase since Q2 2014 and the largest number of corporates experiencing significant distress in at least five years.

The Red Flag Alert research for Q2 2017, which monitors the financial health of UK companies, showed that SMEs made up the majority of this increase, with ‘Significant’ distress rising 26% to 308,423 businesses, while large companies saw distress rise by just 12% year-on-year to 21,411 businesses at the end of Q2 2017.

Among the sectors facing the largest increases in ‘Significant’ financial distress, property and construction saw substantial rises of 32% and 22% respectively, with 28,259 real estate businesses (Q2 2016: 21,373) and 40,495 construction companies (Q2 2016: 33,222) finishing the period in a state of ‘Significant’ financial distress, providing further evidence of a slowdown in the UK housing and construction markets.

Julie Palmer, Regional Managing Partner for Begbies Traynor, said, “While we are seeing rising levels of distress across all corners of the UK economy, the quarterly deterioration in the property and construction sectors is particularly concerning, raising doubts over whether they have strong enough foundations to cope with upcoming headwinds, from Brexit and the rising cost of imported goods to the widening skills gap and its impact on labour cost inflation.

“In the UK’s consumer facing industries, weak real wage growth and rising levels of personal debt continue to put a strain on the retail, bars, restaurants and leisure sectors, where many businesses have been reluctant to fully pass on the inflationary impact of the weakened pound and higher staff costs from the National Living Wage, for fear of losing customers on price in an increasingly competitive marketplace.

“As the second half of 2017 begins, it’s worrying that so many businesses, particularly SMEs, are facing such instability. These businesses, which are the backbone of our economy, need to be as robust as possible to fuel the UK’s growth post-Brexit, yet these figures indicate that many will struggle to fund increases in working capital and invest in growth.”

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