The true impact of war is hard to ascertain so we must focus on how best to navigate the current challenges and uncertainties, writes Iain Parker
Confidence was just starting to return at the beginning of 2022 with clients and contractors reporting positive construction pipelines.
Some of the post-covid lockdown volatility in materials prices evidenced during 2021 was beginning to normalise and securing a fixed price was easily achievable.
But the hope for a sustained period of normality has now been dashed by the devastating humanitarian crisis in Ukraine. The uncertainty of the conflict is having a major impact on supply chains and prices.
For projects buying now, the situation is very fast moving, uncertain and very difficult to predict. A considerable premium is being paid to achieve a fixed price, where that is even possible.
The price impact is two-fold, the actual stated price of materials being higher (as in the case with British Steel supply), but also the application of fixed price risk additions to cover future price and supply uncertainty, which is particularly difficult to form a view on.
Many contractors are still seeking secure projects to fill their order books in order to recover from covid-19 and to hedge against any downturn in confidence that the war in Ukraine may bring
There is a commonly held view that price levels will stabilise in the short to medium term, once price corrections have been worked through, alternate supply sources determined and, inevitably, there will be an impact on confidence which will reduce demand.
To this point, many contractors are still seeking secure projects to fill their order books in order to recover from covid-19 and to hedge against any downturn in confidence that the war in Ukraine may bring. Developers may adopt a “wait-and-see” approach to uncertainty, pushing investment out to later years in an effort to see through the renewed uncertainty.
> Also read: Force majeure in the context of war
This will bring negative price pressure and potentially abate some of the demand. So contractors need to be considered and realistic in their pricing and, as being evidenced in some instances, assist clients with trying to resolve problems and navigate the situation.
The recent announcement by the Construction Leadership Council for clients and contractors to “play nicely”, both during the pre-construction period and in resolving on-site disputes caused by the Ukraine crisis, is an essential message for the industry.
While it is important to closely track the inflationary effects of the current volatile situation, there is perhaps more merit in trying to work out how best to manage the situation and navigate projects through the current challenges. There is no single answer on how to best to do this, but rather a series of things to contemplate.
More than anything, as the situation evolves, it is vital to understand and track the effects of the conflict
These include tracking and monitoring actual price movement (scrutinising real versus temporary increases); focusing extra hard on the design, giving more attention to the link between design and supply of materials; maximising value engineering to create budget headroom; taking a strategic approach to managing project reserves and contingencies; scrutinising the procurement strategy and engaging with the supply chain to understand their mitigation strategies; considering advanced payments and cashflows and perhaps giving thought to limited fluctuating arrangements (but only in the right environment) and visiting manufacturing facilities to validate production of materials.
The true impact of the war will be difficult to ascertain because of the opaqueness of global supply chains, and the subjective nature of confidence. More than anything, as the situation evolves, it is vital to understand and track the effects of the conflict and how it can impact the specifics of a project.
Iain Parker is a founding partner at cost consultant Alinea