Introduction

The Covid-19 pandemic and national lockdown gave rise to unprecedented disruption to the Construction Industry, UK economy and society in general with the UK officially entering recession at the end of the last quarter.

As we now move out of lockdown towards a new ‘normal’, significant economic uncertainty is still likely to be prevalent for the next couple of years, both from dealing with the longer term implications the pandemic and with the imminent end of the transition period to our final exit from the European Union. There is little sign of a trade deal in sight at the moment and the likelihood that the Government will request an extension to allow resolution appearing remote, leading to a ‘no-deal’ exit and all the challenges that will bring which could be dis-proportionally harsh on the Scottish economy given current levels of trade with Europe.

Market Outlook

Prior to the lockdown the overall rate of growth in construction activity continued to reduce over the last 12 months in line with the reduction on overall GDP growth to under 1.0% per annum.

With forecasts for GDP now indicating a sharp bounce back in 2021 followed by increases of less than 3% over the next three years this would suggest that the growth in total construction output could start to increase marginally or will at least remain static in the short term given the significance to the economy as a whole.

According to the Office for National Statistics, employment (pre lockdown) in the construction industry fell by 4% over the last year, with skill shortages continuing to be an issue across most professions and trades

The latest RICS Market Survey reports that the majority of Quantity Surveyors workload expectations have stabilised in the second quarter although the picture remains fairly negative with responses generally anticipating workloads to decrease by 5% over the next year, albeit 10% less than previously recorded in Q1.

Infrastructure is seen as the exception with 40% of responses anticipating an increase in workloads across most categories over the next year, predominantly due to increased Government spending.

The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions and access to labour and no second lockdown due to Covid-19. However, the figures could vary by +/- up to 5% per annum over the period of the forecast if the outcome of the Brexit negotiations are more or less onerous.

Summary of Forecast
The forecast movements in construction costs currently shown in the BCIS Quarterly Report are as follows: –


Source: BCIS (July 2020)

Tender Price Update

Over the next five years tender prices are forecast to rise by 21% overall.

The All-in Tender Price index is expected to rise at an increasing rate over the next 12 to 18 months.

Tender prices are not expected to fall during 2020 in spite of the sharp reduction in output caused by Covid-19.
In normal circumstances such a significant drop in output would lead to falling tender prices as Contractors seek to maintain turnover.

However, in this case the additional costs of following safe working practices and the impact of contractors reducing their staffing levels or ultimately ceasing trading is likely to be sufficient to prevent a drop in tender prices.

Following the end of the Brexit transition period on 31 December 2020 increased costs of tariffs are expected, when combined with increases in input prices lead to tender price rises over 4%.

The forecast for the following 3 years continues to indicate strong tender price increases driven by improved growth in most sectors, giving rises in excess of input costs.

Building costs are expected to continue to rise over the next 5 years, with increases ranging from 2 – 4% over the next five years. These increases will be predominantly driven by faster rising material prices and wage demands resulting from a reduced labour pool.

Materials prices fell by 0.3% in the last quarter and by 0.7% when compared with the previous year, average increases of around 2.5% per annum are currently forecast for the next 5 years.

Manufacturing input prices fell by 1.0% when compared with a year earlier. Output prices fell by 0.6% over the last year, with reducing levels of demand being mainly responsible.

Wage awards are expected to be agreed at 0.4% per annum in 2020, rising to 4% for next year and falling back to 3% increases for the remainder of the forecast period.

Overall, the forecasts continue to fluctuate regularly both as a result of the Covid-19 pandemic and the fact that there is still little further clarity on the likely trade situation following the withdrawal from the European Union at the end of the transition period.

Construction Output Forecast

Total construction output fell by 1% in Q1 when compared with the previous quarter, but this was followed by a 45% fall in April and an 11% rise in May following the nationwide lockdown. Overall, it was 39% down on May 2019, with new work output following a very similar trend.

Where projects have restarted on-site productivity is expected to reduce by up to 20% depending on the nature of the work, leading to longer construction period and increased costs to contractors and ultimately their clients.

Annual comparisons of new work output over the last year (up to the lockdown) showed most sectors increasing apart from the public non housing sector which fell by 4%.

Average growth was between 2% and 5% but with a 10% increase for public housing.

Over the period of the forecast, new work output is expected to bounce back strongly in 2021, initially lead by the infrastructure sector, assisted by most other sectors, but with output levels taking until late 2022 to return to 2019 levels.

The forecast movements in construction output currently identified in the BCIS Quarterly Report are as follows: –


Source: BCIS (July 2020)

To Summarise

Given the closure of much of the industry during the Covid-19 related lockdown, the results of recent surveys are inevitably quite pessimistic.

Workload indicators dropped further into negative territory over the quarter and when this is combined with the ongoing concerns over labour supply and material availability, overall market confidence in the short term is close to a 10 year low.

Consolidation within the Construction Sector is likely as with any significant downturn there will be financial casualties which could give rise to short term supply chain issues for the larger companies.

Looking further ahead, significant uncertainty remains over the longer term impact of Covid-19 and any subsequent lockdowns / restrictions generally, although current forecasts indicate a relatively quick bounce back in 2021 followed by a period of moderate sustained growth.

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