July started out as a good month in the UK: pubs and restaurants are now open, England made it to the final of a major football tournament for the first time in 55 years and, as of 19 July, all COVID-19 restrictions will be lifted!
With COVID-19 restrictions easing, the construction industry regained momentum and activity levels are now at a seven-year high. However, much like England’s penalty situation, the last couple of years have been troubling for the construction sector as the effects of the COVID-19 pandemic paired with the impact of Brexit has created difficulties. These are now being compounded by the latest challenge: a global shortage in building materials.
Why is there a price increase and material shortage?
It seems there is currently a perfect storm of factors contributing to the materials shortage. The global construction sector quickly regained momentum after a brief lull and the demand for materials has sky-rocketed to the point that supply has failed to catch up. The supply chain was interrupted after many factories across the world were forced to close temporarily last year as a result of lockdowns. These factories are now also facing a lack of raw materials. In addition, there has been a sharp increase in shipping costs due to this increased global demand, not helped by a lack of empty containers and saturated ports. The situation is exacerbated in the UK where, despite calls from the Construction Industry Council and the Road Hauliers Association, the Government has refused to ease restrictions on foreign workers, meaning there is also a shortage of lorry drivers.
A driving force in the escalation of material shortages has come from ‘super power’ countries such as the United States and China whose construction sectors, following the easing of COVID-19 restrictions, have gone from strength to strength. The demand for materials in these countries is high and they are being swiftly snapped up, with many materials pre-sold. As a result contractors are not able to stockpile materials for use on future projects.
This shortage of materials coupled with delays in shipping has caused the cost of building materials to spike.
Which materials have been affected?
The Timber Trade Federation (TTF) claims demand for timber has increased in the UK and elsewhere because housebuilders are catching up on the work missed out on during the national lockdowns. The TTF also claim that Brexit-related complications further impact the national timber shortage as 80% of the softwood used in buildings comes from Europe, with 90% of the softwood used in new-build housing coming from the continent where stock in some sawmills is the lowest in 20 years.
Deliveries of bulk cement are “broadly back to normal” says Mineral Products Associate CEO Nigel Jack. Bagged cement, however, is still in short supply with some merchants subsequently increasing their prices by 15%.
British Electrotechnical and Allied Manufacturers Association (BEAMA) state a large reduction in steel production during early 2020 has caused a worldwide shortage, and the availability of steel remains problematic. This is likely to continue for some time.
A Construction Leadership Council (CLC) report in April said that global demand and factory closures outside of the UK were causing plastic products to face supply issues.
What can you do?
As the price of materials rise and become harder to acquire, the commercial risks increase as profit margins need to be met. The construction sector faces the risk of an increased number of cost claims, and more businesses going into liquidation. This is at a time when the pandemic has already placed a lot of economic strain on businesses.
You may be wondering if it is possible to pass these price increases on under existing contracts. As always, this way will ultimately depend on the wording of the contract itself. For example, there are various pricing mechanisms under the NEC suite of contracts which, if applicable, could enable contractors to share the pain of increased material costs with employers. Similarly, some standard form JCT contracts include optional fluctuation provisions which, if applicable, enable contractors to recover price increases as well as additional taxes payable.
Alternatively, if the unavailability of materials causes an employer to instruct the use of substitute materials, this may give rise to a Relevant Matter and Relevant Event under the JCT suite of contracts, or a Compensation Event under NEC. This may entitle the contractor to recover both the time and cost consequences of such instruction.
Otherwise, contractors should refer to the wording of their order/quotation as this might also reserve the right for the price to be revised in the event that the works commence after a given number of weeks/months after the order was signed.
For new projects, contractors should consider how the drafting of the contract operates when certain materials are in short supply and the materials available are only accessible at a significant price increase. Programme requirements should also be considered as lead times for ordering increase. If issues with the supply and price of material are anticipated, this should be dealt with in the contract. The key is to start the conversation of material availability early and order in good time.