Costs could chip away at contractors’ margins, consultant warns

Arcadis expects construction prices to fall by as much as 6% by the end of 2018 due to Brexit, with the main impact from the vote to leave the European Union to hit next year.

Construction entered recession over the first half of this year and reduced confidence could cause a further contraction, Arcadis said. This in turn will result in growing competition amongst contractors for work.

The firm reported a rise in material costs of between 6-8% over the past year, in part due to the devaluation of sterling following the Brexit vote. This could see contractors caught between a rock and a hard place, with input costs rising as demand falls away.

This predicted cost increase poses the greatest risk to the commercial and residential sectors, where dollar or euro denominated expenditure makes up 20-30% of costs. These increased costs are expected to continue to eat away at contractor margins even as prices fall.

Labour costs are also expected to continue to keep costs high due to the acute skills shortage. Labour input costs will rise 6% per year in the short term, Arcadis predicts.

Current procurement activity in London suggests an increased appetite for bidding ahead of an anticipated fall in demand, Arcadis reported, adding that pipelines outside of infrastructure are uncertain and delays by clients could trigger a price correction.

William Waller, market intelligence lead for Arcadis, said: “There are significant indications that the commercial cycle has peaked in a number of sectors. Any contraction in workload is going to have severe consequences for an industry that has barely recovered from the 2008 crash. 

“The combination of deflating construction prices and inflating input costs will impact overhead and profit levels, potentially leaving the supply chain squeezed in the middle. This could drive commercial behaviours where suppliers ultimately either cannot or will not endure further price deflation, and this is reflected in our forecasts. However, we need to retain some perspective. This is not another 2008.”