Rising costs dent construction’s profits

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Rising costs dent construction’s profits

The recovery in construction is causing the industry to become less profitable, not more, latest data suggests.

The continued growth in construction demand during the fourth quarter of 2013 was accompanied by rising costs for labour and material that outstripped arise in tender prices. As a consequence, profit margins fell.

This is one of the conclusions of the latest Construction Trade Survey, published today. It confirms that Q4 2013 was the first time in more than five years that the industry recorded three consecutive quarters of growth.

Finding skilled labour is also revealed as a growing issue, with 41% of building firms reporting difficulties getting bricklayers during the fourth quarter of 2013, compared with just 3% one year earlier. A further 32% reported that they had difficulty recruiting carpenters compared with only 5% just a year before.

Firms across all areas reported increased output, including building contractors, SMEs, specialist contractors, civil engineers and product manufacturers.

Commenting on the survey, Construction Products Association economics director Noble Francis said:  “The recovery, which started in 2013 Q2, continued, though risks remain.  The rises in activity were slower than in previous quarters, and orders for new work similarly decelerated, potentially highlighting uncertainty amongst contractors as to whether the recovery would be sustained.

“Growth was driven by the housing sector, though this was partially offset by a drop in repair and maintenance work.  Building contractors, SMEs and civil engineers reported rises in output, although Q4 levels were not as strong as Q3.  Indeed, only product manufacturers saw activity levels higher in Q4 than Q3. 

“Tender prices rose again this last quarter, especially for building contractors and civil engineers.  These rises, however, were mitigated by growth in cost inflation, largely owing to increased labour, energy and transport costs.  As a result, most contractors reported a fall in profit margins despite the improving demand over the past 12 months."

Representing major contractors, UKCG director Stephen Ratcliffe said:  “While contractors reported a slowdown in output growth this quarter, the trend over the last year remains one of modest recovery.  Unlike housing, the broader construction sector remains a lagging indicator and we would expect the main growth to come later than the wider economy.

“Rising labour costs highlight the need to tackle skills shortages as we move towards recovery, and for a clear pipeline of future work so firms have the certainty to invest in apprenticeships and other long term training programmes.”

National Federation of Builders chief executive Julia Evans added:  “These figures highlight the fragility of the construction industry’s recovery, which is being driven by house building.  Ongoing investment and future prospects point to further growth for the construction industry as a whole but as the economy recovers, it is important for companies to be at least as vigilant about costs, cash flow and late payment as they were during the downturn.”

Key survey findings include:

  • Private and public new housing were the key drivers of construction growth in Q4 with balances of 20% and 32%, respectively.
  • 15% of building contractors, on balance, stated that activity rose in Q4, though this was a notable drop from the 43% figure in the previous quarter.
  • Building contractors reported activity drops of 13% and 15%, respectively, in housing repair and maintenance and non-housing repair and maintenance.
  • 63% of building contractors reported that costs rose in Q4 versus 49% in Q3.
  • A balance of 2% of building contractors reported that tender prices rose in Q4, although a balance of 14% reported that profit margins had continued to fall.
  • A rise in exports over the next 12 months is expected by both heavy side manufacturers (45% on balance) and light side manufacturers (58% on balance).
  • 34% of building contractors, on balance, reported increased labour costs. 
  • 41% reported difficulties recruiting bricklayers and 32% reported difficulties recruiting carpenters.
  • 76% of specialist contractors reported receiving payments between 30-60 days in Q4; late payment ranks as the most important factor affecting their business.





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