The challenges of 2022
Jessica Barnes, Trainee Solicitor, and Edward Henley, Associate, Trowers & Hamlins
2022 has not been without its challenges. Change and uncertainty have been the background music to the construction industry’s 2022. Political turmoil, the war in Ukraine, the cost-of-living crisis and high inflation have all taken their toll on our sector throughout the supply chain. I am sure we’re all getting a bit fed up with living through so many historical events.
In case you missed it, here are some of the challenges the sector has faced this year:
Inflation
Construction inflation is running at a much higher rate than inflation in the general economy. Input price inflation and energy prices have repeatedly been reported by the ONS as the biggest concerns for businesses. Suppliers are facing increased costs and uncertainty, and to mitigate risk they are holding their prices for a shorter period, not guaranteeing fixed prices, and wanting index linked pricing mechanisms.
Skills shortage
Political turmoil, the war in Ukraine, the cost-of-living crisis and high inflation have all taken their toll on our sector throughout the supply chain.There continues to be a skills shortage across the board in construction. Firms are struggling to find workers with the requisite skills and are unable to fulfil their obligations as a result, leading to project cancellations and postponements. In July 2022, the ONS reported that construction was the industry with the highest proportion of businesses being unable to meet demand, at 66%.
Industry mood
The September RIBA Future Trends survey found that architects are more pessimistic about future workloads now than at any time since the 2009 financial crisis and outside of the first lockdown in 2020. Is this setting the scene for 2023?
Materials shortages and prices
Firms are struggling to find workers with the requisite skills and are unable to fulfil their obligations as a result, leading to project cancellations and postponements.
The ONS reported that in October one in five construction businesses with 10 or more employees were experiencing global supply chain disruption. Although not as extreme as the shortages seen in 2021, amidst high inflation rates, materials and their cost has continued to be a big industry concern in 2022.
On the other side of the coin, we saw the first fall in construction materials sales since the initial 2020 lockdowns. 12% of heavy side firms reported to the Construction Products Association’s state of trade survey that construction products sales fell in quarter three compared with quarter two.
Looking to 2023
Yet, the stats are clear: our sector has seen a bounce back in demand following the COVID-related disruption. The latest data released by the Office for National Statistics (ONS), relating to October 2022, reported the highest level of construction output (£15,248 million) since records began in 2010. This is 4.8% above the output reported in February 2020 pre-pandemic. We’re back, baby. Maybe.
Looking ahead, we anticipate a contraction in sales and activity. As confidence in the market recedes, projects may be paused while we wait for a clearer picture of the impact of the volatility in the market and of 2022. Building.co.uk suggests that across the sector we could see a sustained period of high variable and fixed input costs along with suppressed output prices from increased competition and weaker relative demand.
So how can this be navigated?
On the other side of the coin, we saw the first fall in construction materials sales since the initial 2020 lockdowns.Our clients are getting creative. They are looking to different and modern methods of delivering a project, with a greater focus on pre-fabrication of products and modular buildings. They are purchasing materials in advance and storing them off-site or even in the manufacturer’s warehouses, using vesting certificates and bonds to secure the cost they have outlaid in doing so.
On pricing, it’s clear lump sum pricing structures are becoming passé. We have spent much of this year drafting and negotiating balanced and fair pricing mechanisms, including index-linked reviews, creative provisional sum and open book clauses to cover off risk in the case of specific materials as well as embracing the long-forgotten JCT fluctuations provisions (remember them?).
Extraordinary challenges can present great opportunities. However, you decide to do your project, it has never been more crucial to put good contract management at the heart of how we approach construction in 2023.
Jessica Barnes, Trainee Solicitor, and Edward Henley, Associate, Trowers & Hamlins