“We’ve had six fantastic years of steady growth. Now it feels much more fragile.”
What is keeping this contractor awake at night is not an economic turn for the worse, but the creeping inflationary climate we find ourselves in. Shortages of good staff and a buoyant workload have already pushed salary increases into near double-digit figures, with labour hikes not far behind.
Now, if you haven’t already done so, it’s time to keep a close watch on materials. According to government figures the price increase across all materials from January to July was 5.4%, more than three times the general rate of inflation. Anything made of steel – nails included – costs at least 50% more than it did last year, as manufacturers struggle to cope with demand fuelled by the boom in China. Now to this list add cement, which one supplier is warning will rise by 15% in the new year (see page 22). Part of this is specific to the manufacture of this material, as new health and safety legislation requires the process to be changed. But the main reasons for the hike – sky-high energy costs – could also impact on other products that are energy-intensive to produce, such as glass, gypsum and ceramics. Soaring oil prices and raw materials and lack of supply have meant that industrial users are now paying 25% more for electricity and 40% more for gas than they were a year ago.
There was little comfort on that score this week when a year-long report by the gas industry regulator Ofgem cleared the producers of price-fixing. Manufacturers have also had to absorb the climate change levy and reduce their emissions. It gets worse, says Castle Cement, with the working time directive restricting the hours its drivers can work, thereby increasing delivery costs. And the impact of this legislation won’t stop at getting cement on site. In these times, project managers should realise that if they screw up on a delivery time and the lorry has to hang around, they will be clobbered for it.
With the cost of construction expected to go up 5% this year, the indications are that price increases are being passed on to the customer (see Building Intelligence, pages 63-71). And there is no visible sign that escalation in costs is yet dampening down demand – the usual corrective for inflation. That may come though in the cooling of the housing market. For the short and medium term, contractors and specialists certainly need to have their wits about them – and have their best risk-management caps on – to navigate a period reminiscent of the 1970s.
One way of doing this is to have a contract clause that allows for project costs to be increased to take rampant inflation into consideration – a practice that has not made an appearance since three-day weeks and power cuts. Yes, indexation is being dusted down and written into agreements – presumably with clients kicking and screaming. Meanwhile, some contractors are trying to minimise risk by opting for fixed-price materials deals with their suppliers, whereby the price stays the same no matter what the current rate. Whatever methods are employed, though, it seems that larger, long-term projects should start carrying a health warning.
Denise Chevin, editor