Manufacturers increasing their prices is only one of the challenges facing contractors as inflation rockets, says Hamish MacGregor.
IN the week that I write, the Construction Products Association (CPA) is warning in its latest quarterly forecast of a ‘dramatic slowing of growth, with uncertainty ahead as global issues start to affect the UK market’.
One of the strongest warning signs is growing price pressure and inflation. The CPA describes how rising energy costs are driving near-record price increases in construction products and how the Ukraine situation is exacerbating this issue. With inflation currently around 7%, the CPA believes it could easily hit double digit levels before too long, maybe (hopefully) just briefly.
According to Professor Noble Francis, CPA economics director: ‘The major challenge is creeping uncertainty. The immediate picture is one of resilient demand and healthy pipelines. Longer term, the current inflationary pressures, if sustained, will have an increasingly depressing impact, while the continuation, or potential escalation, of conflict in Europe presents an existential risk.
‘Specialist sub-contractors are feeling the effects first, particularly those working to fixed-price contracts. For future projects, contractors will be forced to re-price, add fluctuation clauses, and introduce risk-sharing arrangements to deal with the uncertainty over potential cost inflation.’
As a sector comprising ‘specialist sub-contractors’, we do know exactly what he’s talking about and the risks that await us. At a time when we hoped to be getting through Covid-19 at last and returning to ‘normality’, we find a whole set of other challenges facing us, chief among which is rapid price inflation.
One of the biggest problems we are encountering is manufacturers increasing their prices. We understand that this is not caused by manufacturers profiteering, but is simply a reflection of them needing to cover themselves with regard to the rapidly escalating prices that their businesses are experiencing, particularly in connection with energy costs. The fact that we understand this doesn’t alter the fact however that these price increases create significant problems for flooring contractors.
The norm always used to be annual price reviews. Then that went to six months and now it’s more like every four months in some cases. This means of course that we have to follow them and increase our prices when we are pricing jobs for our clients.
The problem however is that it is easy to get caught out when we have priced a job for six months, and then the manufacturers we are buying products from renege on the six months, as they have changed their terms and conditions to cover themselves.
In response to this situation, we at the CFA we have been engaging with our lawyers in order to get the best advice we can in order to help our members protect themselves legally. Our new guidance note on managing programme delays and increased costs was presented at a member webinar at the beginning of May.
This gives members advice on how to manage the difficulties that are arising around material delays and also suggests the best legal terms to include in contracts. More detail on this is included in the CFA News page of this issue.
Despite the difficulties currently being experienced by our sector – firefighting difficulties we might call them – we must not lose sight of the key longterm issues as well. Chief among these is the aspiration to have a strong and secure manufacturing sector in the UK.
If we were able to encourage flooring manufacturers old and new to return to the UK and open up new factories, this would add vibrancy and diversity to our existing manufacturing sector, it would help boost employment, and would cut down the enormous carbon footprint bringing material into the UK from overseas.
I believe this must be a priority issue for the Westminster government and also for the governments of the devolved nations. At the very least, it will require more grants to be made available.
Government has claimed one of the benefits of Brexit is that, freed from the shackles of EU anti-competition law, we’re now able to support businesses in a more unfettered way than in the past.
So let’s see it! This is about protecting and reinvigorating our manufacturing sector for the future.
To further strengthen the sustainability proposition, government should also consider investing in a recycling facility in the UK, as they have in Europe. This is a point made in the CFA Sustainability Guide, which you can read online from the CFJ website this month – and such government support would represent a very powerful statement of support for a sustainable UK industry based on British manufacturing supporting British skills and jobs.