The Impact Of The Ukraine Crisis On Construction
We look at the impact of the Ukraine crisis on construction and how it will affect the cost and supply of building materials.
Prior to the Russian invasion, the sector was far from normal. The pandemic alone had resulted in material shortages and significant price inflation, resulting in a “new normal” establishing itself within the sector.
Coupled with Brexit, which threw up a whole new set of challenges, stability was a long forgotten feeling and until the end of February both factors contributed to project delays, cost increases and, in some cases, the abandonment of construction projects.
On the 24th February, Russia invaded Ukraine and given the already rocky start to 2022, the invasion added a further unneeded air of unpredictability within the construction sector.
We wanted look into what direct effects this is having on the construction sector, and how long the impact could last.
Oil, Gas & Fuel Costs
The UK imported 13% of its total fuel from Russia in 2019. Compared to mainland Europe, the UK is less reliant on Russia for its energy supply.
However, any disruption to the supply of energy for our continental friends will affect wholesale prices in the UK to a greater extent than implied by direct trade links.
As the conflict progresses experts have warned that petrol prices could reach £2.50 per litre, with diesel reaching £3.00, on top of potential rationing. With natural gas and oil prices being affected, there will be a knock-on effect with the cost of plastics and fuel.
Therefore every delivery, every vehicle and every employee traveling between sites will have greater costs associated with them. Additionally the cost of a bottle of gas is currently 25% higher than 6 months ago, with projects requiring hot works likely to face further cost increases.
Russia is a major exporter of metals such as nickel and palladium, which if withheld could create disruptions in the supply chains of multiple sectors including construction. Nickel, a key ingredient for making stainless steel, has reportedly doubled in price since the invasion began.
Scaffolding has also been impacted greatly by the invasion due to the surging costs of various metal products used in its production, impacting projects heavily reliant on such access equipment.
A ban on “Conflict Timber” from Russia and Belarus, has resulted in trade body Timber Development UK warning that consumers should brace for a fresh wave of price volatility. Currently much of the imported timber from these regions is considered part of pre-invasion stock, so forecasts are predicting that the sector is just about to see the effects of import bans.
Tender documents usually require costs to be fixed for a certain duration, this can range anywhere between 3 to 12 months. However, in today’s market, knowing where costs will be in 3 weeks poses challenges.
Manufacturers and suppliers, like contractors are in a tricky position, do they build in potential cost increases (which are completely assumptive, albeit likely) and risk losing a project on cost?
Or should the emphasis be on the client to anticipate increases due to volatility, and therefore include a contingency in the contract sum for material cost increases?
The Construction Leadership Council (CLC) have warned that “Without price continuity, it is harder for trades to quote for projects on fixed price contracts, and then seek to pass onto their customers any price increases for materials that would otherwise erode their profit margin,”
“Furthermore, as manufacturers reprice materials and SME contractors continue to be required to sign up to fixed price contracts in advance of project delivery periods, considerable pressure is mounting on SMEs at delivery level.”
What To Expect (For The Foreseeable Future)
First and foremost, it’s important to accept that costs very rarely go down. So, when the invasion in Ukraine reaches its end, whatever that conclusion may be, it is unrealistic to think costs will subside to pre-invasion, pre-Covid and pre-Brexit levels…Sadly those days are most likely gone.
Supply networks and supply chains will change and materials will be sourced from new regions. However, the reason that we are not stocking our shelves currently, is cost. So while your timber may no longer be sourced from Russia, it is likely to be more expensive.
The CLC has warned that the impact from the invasion of Ukraine on UK construction is “only beginning to be felt”. While reporting a 10-15% price inflation on energy-intensive products such as steel, cement and glass over the last 3 months.
Costs will remain volatile for some time however, as seen through the pandemic and Brexit, the sector will manage to preserver and prosper.
Projects should have anticipated cost increases built-in to make sure they are not delayed (incurring further cost increases) and ensuring contractors are not working to cost, looking for opportunities to cut corners and make up for lost margins. The inclusion of ‘material cost increase contingencies‘ should be a consideration.
Educating clients on the volatility of the sector is critical, as this will ensure planning takes into consideration the volatility and therefore mitigates its effects.
While certainly not gleeful reading, it’s not all doom and gloom. The sector will certainly continue to face challenges for months, if not years. But if we work collaboratively and intelligently on projects, educate our clients and plan in and anticipate volatility, the sector will continue to deliver projects as planned.