As the construction industry emerges from the Coronavirus lockdown, with reduced workers on site, the key issue is a shortage of materials. Supply chains have been disrupted by the shutdowns in China and throughout Europe. This is a particular issue for the owner-managed businesses in the sector who are dependent on their local builders merchants and who have not got the capital to stockpile key materials. They are therefore finding it difficult to source materials as the merchants are struggling to find supplies to restock their shelves as they reopen.
Is this an indication of things to come post the Brexit transition in 2021?
The Department for Business, Energy and Industrial Strategy have released statistics of building materials and components for the month of May 2020. The report also gives details of the trade between the UK and the EU, and the trade in building materials. The UK industry is hugely dependent on supplies from the EU – with gross imports of goods in 2019 of £17.8bn, and net imports, after deduction of the value of exports, of £10bn. In Q1 2020 UK net imports were £2.1bn; a small fall from the net figure of £2.8bn in Q1 2019. However, to assume that this is due to a restructuring of the supply chain in anticipation of Brexit is dangerous as Europe started closing down early in March, well before the UK, in response to the Coronavirus pandemic.
Is the construction industry ready for an exit on 31 December 2020?
To avoid chaos in January 2021, planning is required now. The key issue is that UK supply chains are fragmented. Large developers can (and do) put pressure on their suppliers to ensure that they have sufficient supplies in the UK to keep their sites operational and expect them to plan for the expected delays at ports as customs clearances and administration are dealt with post-Brexit. Most construction companies and independent developers are not in this fortunate position. They have the choice of building up their own stockpiles (and funding the cost not only of the materials but also the storage) or hoping their suppliers are making the investment required. One point that everyone is agreed on is that material costs will continue to rise.
The industry needs to look at alternative suppliers, both in the UK and elsewhere in the world. In 2019 the UK imported sawn wood worth £800m, £500m of aluminium structural units and a further £500m of aluminium for fabrication, £320m of copper piping, £236m concrete reinforcing bars and £138m clay bricks. We have brickworks in the UK, and the ability to produce these other materials. As security of the supply chain, increasing costs for materials imported from the EU, and the ‘carbon’ cost of getting materials to site all grow in importance, the increase in costs associated with production in the UK may appear to be in line with EU costs. The increase in supply from the UK will also be a “win-win” for the economy, with domestic employment by suppliers helping the country thrive and recover from the financial impact of both Coronavirus and Brexit.
How will Brexit impact UK labour capacity?
Labour, and the UK’s dependence on skilled site workers from the EU, has been discussed at length in the press. It is interesting to note that labour has not been an issue on the reopening of sites in May. Indeed, there has been commentary about a fall in labour rates of 10-15% as the reduced number allowed on site means there is greater competition for the jobs that are available. Construction companies should not become complacent about this issue. When sites are operating with no restrictions, this issue will become pressing again. Labour surveys in 2017 reported over a third of the UK work force in the industry are over 50, and 500,000 were expected to retire by 2027. If we lose the estimated 200,000 migrant workers on construction sites, a massive recruitment and training drive will be essential. The UK unemployment figures are rising, so recruitment may not be as challenging as anticipated in past years, but it is questionable if the necessary investment has been made yet in the training by vocational colleges and employers. Our workforce of individual subcontractors needs to be replaced through a combination of recruitment and training now.
There is a huge opportunity for the Government to help by providing funding for training for these essential jobs and to get young people off the unemployment register in 2020 and beyond. It is hoped that the Chancellor will include this in his post-COVID-19 budget.
How could modern methods of construction help?
One possible solution to the issue of material supplies and a shortage of site workers is to embrace more or the ‘modern methods of construction’ (MMC). Offsite manufacturing, such as timber frames, has been used by the industry for decades. In the last decade this industry has gained huge momentum, with houses, pods and numerous other variants being developed. Student accommodation developers, and now build-to-rent developers, have led the way in the residential sector.
One problem has been that funders, with a few notable exceptions, are finding it challenging to assess their risks, especially when manufacturing is undertaken in countries where they have limited rights, such as China. Manufacturing units that are being set up in the UK make funding a development using ‘MMC’ easier, and some of the larger developers have gone a step further and have adopted an ‘integrated model’ where they own the factory so that they get control of the whole process. This model gives them control over quality and delivery timetables and remove the risks for funders.
Opportunities do exist for UK entrepreneurs to grab some of the market, serving the smaller developers and creating some of the jobs and wealth that the UK needs as we take on the challenges of the next decade. However, whilst MMC may be part of the answer to the challenges facing the industry it is not ‘all’ of the answer. Material supplies and training of a new workforce are still essential, and are immediate challenges.
If you wish to discuss how this will affect your business, please contact Heather Powell or your usual Blick Rothenberg partner.
Or if you would like to see more of our insights and guidance for the industry, please visit our Property & Construction Hub.