2021 - A Challenging Start
Well, this year has started with a bang!
We, as an industry, have already proven itself to be flexible and responsive to the challenges of 2020. Which, by and large, were all COVID19 related.
The abrupt lockdowns, initial site closures and new operating procedures have by all accounts caused a bump or two, but not a fall. Am I bold enough to say at this point, no real damage done?.
The government continued directives that “Construction must remain operational” have been our absolute saving grace, without that absolute clarity and support, or even push to continue, I am sure we would have fallen off the preverbal cliff.
There has always been hearsay and scaremongering in Construction, everyone has an opinion, everyone has lived and worked through a recession, or two. Everyone these days is a scientist. A construction site often has more gossip than a 1950’s mothers meet.
So, the point of this little ditty is to cut through some of the mutterings and note the reality of the construction cost challenges that we face as we stutter and stumble into 2021.
The BREXIT Hangover
Well, BREXIT is done.
Whatever ‘done’ is, is yet to be fully understood of course. Again, a huge amount of fear and gossip over, well, many years has left us floating around in some kind of BREXIT fog. On Monday 21st December many countries closed their borders to the UK. Under the threat of the new and improved COVID strain, or BREXIT related? Who knows really.
The reality is that the supply chain did stutter. Queues of lorries seen stranded on the motorway and then moved to contingency parking areas. Hundreds and hundreds stuck with perishables and important supplies on board. But only for a day or two. Our illustrious leader stated with pride, that what saved us from food, medicine and other shortages by the border closures were the BREXIT contingency measures already in place. I found this both comforting and disconcerting.
Our contingency plans do allow for delays to logistics and transportation and provide alternative routes for supply. So, what’s the reality of the hangover? Additional paperwork required, additional time, maybe additional transportation costs. A delay, not a stop. A bump, not a fall.
The material cost impact of the BREXIT negotiations, however, are yet to be realised. The array of tariff’s, charges and new VAT levels is an absolute minefield. A huge challenge to navigate and understand, let alone relay up the supply chain just as yet.
We are currently reliant entirely upon the supply chain advising us, as and when the impact becomes known. Making it impossible to predict and quantify. I’ll rely on the oracle for guidance on this over the coming year, on the material cost impact that will inevitably filter through to construction costs.
As an aside I found a prohibition on the importation of goods from Crimea or Sevastopol. Well, alrighty then. That we can handle.
COVID, The Trilogy
The sequel, it seems, is more impactful than the original.
The number of cases of COVID now in circulation is astonishing. The impact of those with the big C and those who are now in isolation has had a huge impact on all workforces. By all accounts, this will continue for a few months yet. We cannot deny the impact of labour shortages and disrupted attendances can have on a project.
Our project at West Ham Lane has had no fewer than 180 labour inductions over a 6 month period on-site. No, we did not have a workforce of 180. It shows the dramatic effect COVID has had on absenteeism and the number of replacements a single sub-contractor has had to provide. We would expect a workforce of 40 or so for the duration.
With the improved testing availability, testing facilities and the track and trace notifications to self-isolate, we can only predict that the fluctuation within the workforce will likely be exaggerated from that of the original wave.
CLIC, and You’re Open
The Construction Industry Leadership Council (CLIC) issued Site Operating Procedures v7 on the 7th January 2021.
Every version; slightly stricter, slightly more stringent but still manageable. Operational, and long may it continue. The reality of the CLIC SOP v7 is an increase of preliminary costs to the Contractor. PPE, site set-up and additional management required.
The impact of the SOP is of course hugely dependent upon the programme stage of construction. Luckily, our project at West Ham Lane has been totally unaffected thus far, and remains to date, bang on programme. We are fortunate to have been in the ground and delivering concrete frame construction to the first floor for most of 2020. Credit too, to the Contractor on this.
However, those projects that are refurbishment, watertight and working inside or where labour and trades are in close proximity of each other will have much slower progress than that programmed.
It is the main contractors that are suffering here, with delays to the construction programme and an increase in preliminary cost’s. Generally, time and not cost have been awarded as a result of COVID delays thus far. However, I would urge clients and employers to find a mid-way ground here, if possible. We are all in the same storm.
A Steely Gaze
The cost of steel during 2020, fluctuated, wildly.
An early rise, a dip in the summer and a steady rise up again. This had a direct impact upon cost plans prepared by ourselves at Redshell, where allowances for structural steel were woefully short. The cost of structural steel was heavily dependent on when you asked.
There is no confusion now. The cost of steel has already risen by almost 20% from December 2020 prices to January 2021. All those with a steel-frame based project, I hope you’ve procured already. This is a huge increase in a short timeframe. Current predictions note the peak of price increases is expected during the first quarter of 2021. They haven’t peaked yet and it would be safe to say that prices will not fall back to their low of the summer of 2020.
Contractors’ Profiteering, or Not
Contractor’s tendered levels of overheads and profit have fallen. I have seen reduced levels in the last quarter of 2020 and I would suspect, levels will continue to stay low for 2021.
Now, I know you developer sorts. Stop rubbing your hands with glee. This is not the sign of a healthy industry. Main contractor profit levels of 10% or even 6% as I received in December are not the full picture. Contractors on both levels have, or tried to, hide additional ‘allowances’ included within build rates, material rates and risk items.
As much as this pain’s me, I understand the motives. A healthier market would be more confident in their profit levels and the need for slightly more underhand claims negated. With these additional side allowances discovered and thereby removed prior to Contract, the contractors are commencing projects on the back foot. Now, we all know how this will play out, don’t we?
The Oracle Cost Predictions
In fluctuating times, our oracle at the RICS becomes increasingly important. The guides and indices’ available are an absolute backbone to cost planning and the projection of cost risk allowances going forward.
2020 saw a steady fall in the Tender Price Index (TPI) and was indeed realised in the tender returns received, particularly in the 4th Quarter of 2020. However, we should brace for a sharp increase in 2021. The BCIS are predicting a 4.5% increase from January 2021 through the year to December 2021. This is again, a sharp rise over a short period of time.
However, it is worth noting that following the fall of 2020, the end result is a level largely back at that of 2019. A pricing index level of 335 is predicted at the end of 2021, with a previous pricing index level of 332 at the end of 2019.
There may be a trend for the rising TPI to continue into 2022, we will have to wait and see.
With feasibility estimates and cost plans being prepared some time before tendering, it’s fair to say that any prepared last year will be on the low side. Unless a fair contingency had been allowed.
Now, we all love a graph these days!. Here’s the RICS BCIS All-in TPI showing the actual and predicted percentage change year on year.
In summary, fluctuating times.
2021 will be a year of keeping steady. No rash moves. Allow contingencies, expect and programme in delays. This is not the year for and hopeful expectations and naive idealism. Keep it local, if we can. If the vaccination programme runs on time and is as effective as we all hope, I am sure the confidence of 2022 will know no bounds.
