You can’t make bricks without straw

Construction Materials - Shortages and Cost Increases

Housebuilders across the UK are currently facing significant challenges caused by shortages, and the rising cost, of some construction materials.

Recent months have seen reports of shortages of roofing materials, timber, plumbing materials, bathroom suites, white goods, screws and fixings.

Some caused by factories struggling to keep up with demand and others by congestion at UK ports – with a quarter of all construction materials coming from overseas.

Costs have also been pushed up by various factors, including the constrained supply and increased shipping costs because of a global shortage of empty shipping containers.

Government statistics indicated a 6.7% increase in the cost of materials required for new housing projects between January 2020 and January 2021.

Appraisals and Contingencies

With this backdrop of the lack of supply and the rising cost of materials housebuilders are having to review their cost appraisals and contingencies very carefully.

Delays will push up their finance costs on top of the direct impact of increases in the unit price of materials.

In the background funders will also be second guessing whether the contingencies allowed for are adequate when deciding whether to lend and on what terms.

Mitigation

Across the housebuilding sector and the construction industry generally parties are seeking to mitigate the risks associated with the lack of availability of materials and rising prices.

Possible measures include:

• reviewing how well set up your existing suppliers are to cope with supply issues and manage rising costs;
• diversifying your supply chain;
• keeping a close eye on UK government and international policy and seeking to anticipate and side step potentially negative impacts; and
• stockpiling – but that can be expensive and have a negative impact on the industry as a whole.

Contractual Risk Allocation and Managing Non-Performance

It might seem attractive to try and push the risk of the impact of materials delays and cost increases onto your suppliers and sub-contractors.

However, that may simply have the effect of limiting the pool of suppliers and sub-contractors that are prepared to contract with you.

Also, suppliers and sub-contractors that are prepared to take on risks that they cannot effectively manage are less likely to remain in business and be able to deliver on those contracts.

In the midst of the impact of both Brexit and COVID-19 we have helped clients to carefully assess risk and to draft and negotiate bespoke contracts terms which fairly allocate risks in a turbulent environment.

In relation to contracts entered into prior to Brexit, COVID-19 and other recent challenges having come over the horizon - we have been helping clients manage and address the non performance of their suppliers and sub-contractors.

Very often that does not involve rigid enforcement of contractual terms that were entered into in a very different context – but rather finding a path that achieves the optimum achievable outcome for the client - taking account of the financial circumstances of the supplier or sub-contractor.

The use of the sledgehammer is rarely effective in these circumstances.

Taking the long view

None of us can have any significant influence on the availability and cost of construction materials.

However, we do all need to have a broad picture of the global and local political and economic environment insofar as that is likely to impact on the availability and cost of construction materials.

That should help us to anticipate the direction of travel.

That knowledge - along with careful and realistic planning - can allow parties to put themselves in the best position to set up and manage their projects, funding arrangements and supply chains as effectively as possible.