Rising cost pressures expected to dent construction industry growth

Firms across the construction industry are bracing themselves for further cost pressures after reporting a rise in raw material prices despite growth across the industry during 2016 Q4.

An increase in sales, output and workloads were all reported during the quarter but forward-looking indicators suggest the outlook for building activity during 2017 has worsened. The Construction Products Association’s Construction Trade Survey Q4 showed that overall costs increased for 88% of civil engineering contractors, whilst 75% of main contractors, 78% of heavy side manufacturers and 88% of light side manufacturers also reported a rise in raw materials costs.

The latest statistics also highlighted a skills shortage affecting key on-site trades with main contractors reporting shortages of carpenters and plasterers at their highest in nine years.

Commenting on the survey, Rebecca Larkin, Senior Economist at the CPA, said:

“The construction industry closed 2016 on a strong note, with activity improving for firms throughout the supply chain. However, order books and enquiries were lower for contractors and signal a weaker outlook for 2017.

“Cost pressures continued to rise, particularly for imported raw materials, and compound the risks that activity will be unable to grow at current rates over the next 12 months. The construction products manufacturing industry is responsible for directly employing 280,000 people and whilst government has a role to play in providing certainty for projects, industry will need to find ways to navigate rising costs.”

Richard Beresford, Chief Executive of the National Federation of Builders said:

“The decrease in both public and private housing is a call to the Government to be bold in its housing aspirations. When Theresa May came to office, she promised to deliver an economy that works for everyone. If we cannot provide people with the most basic requirement such as a roof over their head, then the Housing White Paper will have failed.”

Brian Berry, Chief Executive of the Federation of Master Builders said:

“Rising material prices and growing skills shortages dampened growth among construction SMEs in the final three months of last year. The optimism that we saw from small construction firms during most of 2016 has now dropped off because of growing concerns about rising costs. The pledge from the Government that it will focus on finding ways to boost smaller scale house builders is therefore timely as it’s an area that is ripe for growth and could help counteract the risk of stagnation within the SME part of the construction industry.”

Key survey findings include:

  • 38% of main building contractors, on balance, reported that construction output rose in the fourth quarter of 2016 compared with a year ago
  • A balance of 14% of specialist contractors reported a rise in output during Q4
  • 11% of civil engineers, on balance, reported an increase in workloads during Q4
  • On balance, 12% of SME contractors reported increased workloads in Q4 compared to three months earlier
  • Main contractors reported a decrease in orders in private housing, public housing, private industrial and private commercial
  • 12% of SMEs reported an increase in enquiries in Q4, on balance, but 38% of specialist contractors reported a decrease
  • 19% of civil engineering firms reported an increase in new orders in Q4, on balance
  • Overall costs increased for 88% of civil engineers contractors, whilst 75% of main contractors, 78% of heavy side manufacturers and 88% of light side manufacturers reported raw materials costs rose in Q4
  • 71% of main contractors reported difficulties recruiting carpenters, 67% for plasterers and 40% for bricklayers in Q4.