How to manage residential construction costs during volatile times
COVID and Brexit have sent residential construction costs on a roller-coaster ride. We break down what is causing the pricing volatility and how to manage it.
How much did construction costs increase in 2021?
Over recent decades, labour, materials, and margin components have been fairly stable which made it easy to manage changes. However, in the last few years, all three of these components experienced significant shocks:
- MATERIALS PRICES: Global supply and transport issues, which were predominantly caused by COVID, have now been compounded by UK-based supply chain issues. This has reduced supply and increased key materials prices by an average of 20-30%.
- LABOUR PRICES: There has been a reduction in labour supply mainly caused by Britain leaving the EU. As a result, labour prices have increased by around 2 - 5%.
- MARGIN: The complications with material supplies and labour have created difficulties for construction companies and reduced their actual profit margins in the short term. As a reaction against this volatility, overall margins are being increased. Both due to the increased operating costs but also as a contingency against future price increases, generally around 2 - 10%.
If you put these price increases together the fundamental (long term) cost of carrying out a project is likely to increase in price by around 5 - 10%. If we apply this to the average project on our platform, which is £250k, this would equate to an increase of £12.5 - £25k. Though this is a significant amount, it is actually less than the current sentiment might suggest.
This is because volatility itself creates price changes that are higher than the fundamental increases because contractors are increasing their margins further to guard against future volatility.
This is a move that has been somewhat enabled by the higher than usual demand and limited supply. The impact is harder to calculate but anecdotally has been seen to increase margins by another 10 - 15% and therefore overall 15 - 25%.
Will construction costs continue to rise or go down in 2022?
This is of course difficult to predict. However, we’ve spoken to a range of materials suppliers, contractors, and quantity surveyors.
- MATERIALS PRICES will continue to be affected by shortages for perhaps another six to twelve months, hopefully decreasing in severity over that period.
- LABOUR PRICES may remain higher, it is difficult to predict how much of the increase is a result of COVID versus leaving the EU but we think probably will stay for the long term.
- MARGIN will reduce relative to the material supply issues over the next six months and also reduce as labour supply and construction demand normalises.
However, these are the fundamental supply-side costs, as mentioned above, psychology and demand have the potential to cause even more dramatic swings. These are harder to predict although, we would expect them to similarly reduce over time.
How BuildPartner can help manage volatile pricing
BuildPartner creates price transparency in small construction work. To do this, it provides a pricing platform for project managers, contractors, and homeowners. The product provides benchmark costs based on a series of templates, a scheduling tool showing live average prices, and quote creation and comparison functionality.
Therefore, since it collects live price information, it is in a unique position to provide help during this volatile period.
At its heart, BuildPartner is a big database of tasks and prices which can be selected, viewed and analysed in different ways at different times. The price information for which comes from three sources:
- Project managers input materials and their prices.
- Contractors input labour, materials, and margin.
- Quantity surveyors and estimators research and check all of the above.
We monitor changes within these accounts, compare them to other market sources such as materials suppliers then aggregate those changes. Any major deviations we manually update in our average prices and suggest that builders make these changes in their accounts.
Project cost management: What to do about it
From our point of view
Our core responsibility to clients is to provide accurate price information for budgeting. Since project lifecycles from ideation to completion range from a few months to several years, we must take at least a medium-term view. If we were to react too dramatically to short-term shifts, we would end up skewing peoples’ plans unnecessarily.
We think labour and margin are subject to some infrastructural shifts as we have seen this reflected in our builders’ accounts. Therefore we have slightly increased the default labour rates and margins in our benchmark prices by 3-5%. However, we would recommend a 10% contingency to handle short-term changes, especially in materials prices.
From the architects’ and contractors’ point of view
There is no doubt this is a difficult period. For those who have a time horizon shorter than 6 months, the answer might be to grin and bear it. But for those who have a longer time horizon, consider waiting for prices to stabilize.
However, we are seeing certain patterns being repeated which we recommend avoiding:
- If you shop around and miraculously find a cheaper than expected quote, both from main contractors and subcontractors, beware, it is likely to be a mistake or an inexperienced business.
- Budget additional time and therefore money for lead times on materials. Do not trust the lead times materials suppliers give you. Though it is not their fault, they cannot say with reasonable certainty what will happen. So double your lead time and assume an effect on preliminary costs and overheads as a result.
- Collaborate and be open with your pricing. Homeowners and builders will have different appetites for risk so finding the right balance will result in the right price. For example, you could consider advising homeowners to accept provisional sums for certain materials. This way a margin for risk will not need to be added to the quote, but instead, advise a personal contingency of 10 - 15% which may or may not be needed.
- If anyone you’re working with is looking unusually stressed, offer support. This is a difficult period for everyone.
- And of course, use BuildPartner. The process will be significantly easier.