Ulster contractors fear storm is brewing

Mark Spence, managing director of Northern Ireland’s Construction Employers Federation

The latest state of trade survey of the Northern Ireland Construction Employers Federation (CEF) reveals, on the one hand, a resilient sector that has bounced back from a Covid-related collapse in spring 2020. But on the other hand it’s all looking horribly uncertain.

The survey was conducted in late December/early January and covered the last six months of 2020. It contained the responses of 80 Northern Ireland-headquartered construction firms with a combined turnover of £1.5bn a year.

The key findings of the survey show that turnover was down 20-25% on 2019 on average 2019. Because of the spring lockdown, there was twice as much work done in the second half of the year as in the first half.

Despite the return to work, only 53% of firms are working at or near full capacity although 82% of firms expect furloughed staff to be retained.

Cost inflation has led to rapid input costs rises with 64% of responders seeing increases in labour costs, 95% in material costs and 67% in plant costs.

Most firms (79%) have experienced delays in supply chains as a result of Covid-19 and Brexit; 35% have seen supply chain delays severely disrupt their business, while 35% haven’t but expect it to in due course.

Asked about prospects for the year ahead, almost three times as many firms (43%) see reduced opportunities in the public sector than those who expect increased opportunities. Two-thirds expect commercial opportunities in Northern Ireland to fall in the next year while only 4% are optimistic of any increase. Respondents had a little more faith in the mainland GB market – 17% see commercial opportunities in the GB increasing, 17% see these reducing.

Mark Spence, managing director of the Construction Employers Federation said of the survey: “The CEF is immensely proud of its members, their employees and supply chains who did so much throughout 2020 to put in place the infrastructure that enabled our health and wider public services across these islands to meet the challenges of the pandemic head on. Our state of trade survey very clearly shows that, with the easing of restrictions on construction activity in the second half of 2020, many firms were able to recover a large part of the turnover lost in the first half of 2020 and, crucially, do it in a Covid-secure manner.

“However what is equally apparent from the survey is that many contractors believe we are facing into a perfect storm.

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“With a challenging commercial market into this year, and likely next, there will undoubtedly be more competition for public works. While this, in many ways, should be seen as a good thing, it must be acknowledged that this is occurring at a time when a significant number of public sector works are being procured as ‘price only’. The absence of ‘quality’ with respect to tender scoring has the capacity to drive the market down to unsustainably low pricing.

“The challenges are exacerbated by the early year impacts on materials supply and pricing. While well-publicised issues on matters like steel imports will, likely, begin to resolve themselves on the supply side, where the price will settle is, at this stage, harder to gauge. That, alone, puts massive pressure on contractors now to price appropriately for both one off projects and, more alarmingly, longer term arrangements such as measured term contracts.

“The draft Northern Ireland Executive budget for 2021/22 that is currently out for consultation shows a growth in annual capital expenditure that is to be welcomed. To build confidence within the industry it is important that its detailed planning its speedily undertaken and published by [government] departments – and that government clients fully understand the multitude of pressures that contractors are currently facing. As we move into the new financial year, it will then be crucial that the Executive works with the industry to develop and embed a recovery strategy that seeks to incentivise the commercial sector to recommence investment.

“We know from the experience of the 2008 recession that the construction industry always feels a lag in terms of the worst effects of an economic downturn. The warning signs are already there. It is incumbent on those that value the sector to ensure it doesn’t come to pass.”

Richard Ramsey, Ulster Bank chief economist for Northern Ireland, said: “The local construction industry rebounded in the second half of last year and recovered much of the turnover lost due to lockdown restrictions. The speed and scale of the construction sector’s recovery has been much swifter than after the last recession more than a decade ago. Fortunately, this time around, austerity and swingeing cuts to the government’s capital investment plans are not on the menu. Nor is there a legacy of negative equity to sap demand for residential housing for years to come. Nevertheless, there is a sense of déjà vu at some of the challenges facing construction firms in 2021 and beyond.

“Three key challenges evident in the latest Construction Employers’ Federation state of trade survey concern demand, supply-side disruption and inflationary pressures. In turn, the interaction of these factors will put pressure on profitability. Indeed, the spectre of negative profit margins may become more widespread this year like it was a decade ago.

“According to the industry, two key demand challenges stand out. These are the significant reduction in public sector opportunities in 2021; with almost three times as many firms (43%) anticipating reduced opportunities relative to those expecting an increase. Even more stark is the anticipated drop in demand within Northern Ireland’s commercial market. The legacy of Covid-19, both in terms of debt and working from home, will shape demand within this sector for the foreseeable future. Perhaps not surprisingly two-thirds of local firms expect commercial market opportunities to fall in 2021.

“Eight out of 10 construction firms have experienced delays in their supply-chains as a result of either Covid-19 or Brexit. For over one-third of firms (35%) the delays experienced so far have already severely disrupted their business. A further 35% expect severe disruption to occur in due course. Supply-chain disruption has been par for the course during January and it is not just down to Brexit and Covid -19. The global shipping industry is struggling to deliver what the world wants to buy during lockdown. A shortage of containers is choking exports and has triggered a surge in prices. Some ports are reporting tenfold increases in the cost of containers. This has been impacting on manufacturers, consumers and the construction industry.

“Disruption in the global logistics industry adds yet another layer of uncertainty – in terms of cost and delivery times – on top of Brexit and Covid -19 related disruptions. Resilience and patience are two qualities exemplified by the construction industry.  And these virtues will be tested in the coming months. Indeed, local construction firms face a perfect storm of uncertainty as far as public procurement and tendering are concerned. Supply-chain disruptions alongside significant price rises for construction related materials make it difficult, if not impossible, for firms to accurately price tenders on a profitable basis. Given that Northern Ireland’s public procurement tenders are awarded on ‘price only’ evaluations this presents risks to both firms’ profitability and the quality of the projects undertaken. A lack of sufficient workloads could lead to a race to the bottom on price. While this may appear desirable from a value for money perspective, it is not sustainable – nor in the interests of the local economy – to have an unprofitable construction sector.”

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