On the surface, construction is booming with residential property projects dotting the urban landscape. But there is also a growing crisis as the sector is squeezed by global supply chain issues, skills shortages, and skyrocketing prices.
From an outsider’s perspective, at least, things are looking rosy right now. You only need to walk through the average city centre or down a residential street to realise this is one sector that has defied pandemic hardships.
However as a recent article in AAT Comment detailed – the numbers tell a different story: there simply aren’t enough people or resources to keep up with the insatiable demand for new homes and maintenance works. The construction sector is suffering from severe supply chain bottlenecks, resulting in higher prices for components (the price for timber, for example, has soared by 200%, according to some estimates).
There’s a skills shortage too: vacancies are at their highest for 20 years but struggling to be filled, partly thanks to an exodus of foreign workers during Brexit. With construction constituting around 6% of the British economy, the sector is seen as key to the UK’s post-Covid revival. There are worries the shortages in construction could slow this recovery.
What’s behind Britain’s building boom?
The last two year’s have been a roller coaster for construction, from last April’s record 40% fall in output, to a bounce back that has also seen the strongest growth on record.
This robust recovery is partly due to building sites being one of the few workplaces allowed to remain open during the lockdowns of 2020-21, as well as the Government’s emergency cut in stamp duty in England and Northern Ireland, which has prompted a boom in house prices. According to government data, the average price of a UK home soared by 8.9% over the year to April 2021.
With people spending more time cooped up inside their homes over the last 18 months, they’ve also reassessed these living spaces (which are now also workplaces too).
Growth sectors
For the housebuilding goliaths, it’s been a good time, as demonstrated by the impressive figures they’ve posted. This summer, Taylor Wimpey and Barratt Developments announced they expect to reach annual profits of £820m and £800m respectively, a feat set to be repeated by Persimmon, which has already reported pre-tax profits of £480m for the first six months of 2021 (a staggering rise of 64% from the same period last year).
It’s not just the domestic scene that is doing well . Retail and industrial construction are rebounding strongly after a poor year in 2020. Surprisingly, perhaps, office construction is also recovering, buoyed by refurbishment and adaption of workspaces for collaborative and hybrid working.
Materials and products shortages
Supply chain shortages are hampering the construction industry’s record growth. According to the monthly survey by IHS Markit/Cips in July, 77% of firms in the sector reported longer lead times from suppliers. Cement, copper, steel, roof tiles, timber, paint, even kitchen sinks, are all currently scarce.
The dwindling supplies are being created by a perfect storm of issues, such as Brexit (many smaller EU exporters have quit exporting to the UK due to new trade restrictions), an increase in shipping costs due to Covid (the cost of a container load from China has risen from $2,100 to nearly $16,000 within one year) and delays to global supplies caused by the blockage of the Suez canal by the Ever Given in March.
The delays are significant: for example, cold-rolled steel joints used to take six weeks to arrive; now, they take nearly five months.
As a result, the prices of those materials still available have risen sharply.
Kim Redwood-Lee said “One of our clients does loft conversions and has noticed an increase of almost 200% in the cost of timber over the last six months. Having already provided his customers with a fixed quote, he now finds himself in the difficult position of either absorbing the inflated cost of what he has used, or increasing his fee to the customer during the middle of a project, which isn’t ideal.”
The skill shortages
The construction industry isn’t just suffering from a paucity of materials: there aren’t enough builders to go around either. In August, there were 35,000 jobs available in the sector, the highest in 20 years, according to the Office for National Statistics (ONS).
Yet, the number of construction workers from the EU in the UK has fallen by 42% since 2017 (from 208,067 to 120,723) according to a report in the Guardian. The ‘pingdemic’ hasn’t helped matters either.
The staff shortages could put the handbrakes on the UK’s economic recovery from Covid. The Government has a target of building 300,000 new homes a year by the mid 2020s, but the industry will need to recruit an extra 217,000 workers to meet rising demand according to a forecast from the Construction Skills Network (CSN). The regeneration of the north of England could be affected, especially if construction workers heading south to London for higher wages.
Kim Redwood-Lee says “There are many risks in the industry: jobs can go badly, plus margins are tight. Because few companies understand the meaning of profit and loss, we educate our construction clients to ensure they’ve got the financial resources to meet these challenges, and pay their taxes.”
We provide our own Construction Industry Scheme (CIS) payroll service, Eaziserv, whereby contractors deduct money from a subcontractor’s payments before passing it onto HMRC. Kim says “If this isn’t applied consistently and correctly, it can incur penalties of up to £3,000 for late payments, which we can help you avoid”.
“Accounting is fundamental to any business, but with our specialised skill within construction, especially given its volatility and unpredictability, precise cost analysis and cash flow management is crucial”.
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About Oscar Fairchild: Oscar Fairchild (incorporating Redwood Clarke since 01.09.18) is an ACCA chartered and certified and AAT qualified accountancy, financial consultancy & bookkeeping practice with offices in The City of London, and Billericay, Essex. Offering a wide range of services including Self-Assessment Services, Annual Returns, VAT Returns, Credit Control, Payroll, Auto Enrolment Pension and Management Account services to high growth businesses and licensed London taxi drivers across London, Essex and Hertfordshire.
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