Cost Pressures Cast a Shadow over Construction

THE CONSTRUCTION industry experienced growth in the third quarter of 2018, following a weather-related boost to activity in Q2, according to a survey of product manufacturers, contractors, civil engineers and SME builders by the Construction Products Association (CPA).

The survey shows that during quarter three of 2018, 27% of product manufacturers, 25% of main contractors, 16% of SME builders and 10% of civil engineering firms reported an increase in activity. However, output was reported lower for one-third of specialist contractors.

Cost Pressures

Rebecca Larkin, CPA Senior Economist 

Commenting on the survey, Rebecca Larkin, Senior Economist at the CPA, said: “The industry looks to have maintained some of the momentum from its catch-up in the second quarter. However, beneath the top-level growth rate, firms throughout the supply chain are grappling with a narrowing base of activity led by private housing and infrastructure work and rising costs for labour, raw materials and fuel.

“This triple threat for input costs is placing a clear strain on contractors’ profit margins, worsening confidence in an already-heightened environment of risk aversion.”

The new research indicates that the drivers of growth in the next 12 months will be restricted to private housing, repair and maintenance, and infrastructure, whilst further rises in costs have been reducing profit margins for main contractors and specialist contractors since the beginning of 2017. On balance, 80% of main contractors reported a rise in material and labour costs and 90% of product manufacturers reported an increase in fuel costs.

Other key findings from the survey include:

• 16% of SME contractors reported increased workloads in Q3 compared to three months earlier
• Main contractors reported that order books were higher in private new housing, and the housing and non-housing R&M sectors
• 22% of SMEs reported an increase in enquiries in Q3
• Profit margins fell for 7% of main contractors and one-third of specialist contractors in Q3.

Richard Beresford, NFB CEO

Richard Beresford, chief executive of the National Federation of Builders (NFB), said: “The fall in profit margin for 7% of main contractors and 33% of specialist contractors is rather worrying because it is less than one year since the collapse of Carillion. With the economy facing further uncertainty in future months with the UK’s departure from the EU in March 2019, contractors operating with falling profit margins are a reason for concern.”

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