Commercial Work Surges as COVID Restrictions Ease, Leading to a Construction Boom

Posted on 06 April 2022

The easing of COVID restrictions has sparked a surge in commercial projects, resulting in a significant boom in the industry. In March, the Purchasing Managers' Index (PMI) reported a remarkable increase in construction activity within the commercial sector. This growth can be attributed to the relaxation of pandemic-related measures, such as social distancing requirements on construction sites. Consequently, numerous commercial developments that were previously put on hold were resumed last month. This upturn represents the most substantial expansion in output for the sector since June 2021.

The PMI, a compilation by IHS Markit and the Chartered Institute of Procurement & Supply (CIPS), evaluates construction output across various sectors, including commercial, civil, and residential. Each sector is assigned a score, with a value above 50 indicating expansion and below 50 suggesting contraction. The index for March remained consistent with the previous month, registering a score of 59.1.

Within the construction industry, the commercial sector recorded a score of 60.8, demonstrating robust growth. Additionally, both civil (56.3) and residential work (54.9) experienced positive momentum. The index also highlighted a surge in orders across the sector in March, reaching their highest level since August. This increase was fuelled by strong customer demand and a rise in tender opportunities.

The industry faced challenges such as rising fuel prices and supply and demand uncertainties, leading to increased costs. In fact, the analysis revealed that costs in March reached their highest level in six months. Despite these obstacles, Max Jones, the leader of Lloyds Bank's infrastructure and construction team, expressed optimism about the sector's ability to navigate the inflationary pressures. Contractors are employing innovative strategies to address labour and material price hikes. They are investing in their workforce and organisational culture to enhance competitiveness in the labour market, attract and retain talent. Larger contractors are collaborating with clients to share some of the cost burden, while also managing supply chain challenges posed by cost inflation.

Lucy Fulmer, the lead of PwC's creditor markets, acknowledged the industry's increasing optimism but emphasized the impact of unprecedented cost inflation issues on net margins. The construction sector's outlook has taken a downturn due to concerns over the Ukraine conflict, severe cost inflation, and a deteriorating global outlook. In fact, optimism in the industry has reached its lowest level since October 2020.

Mark Robinson, CEO of Scape, emphasised the strain caused by the conflict in Ukraine on existing supply issues, along with the unsustainable rise in energy costs, particularly for those managing tight margins. Robinson expressed hope for the government's forthcoming energy security strategy to stabilise delivery costs and provide greater certainty during the tendering process.

The Construction Leadership Council (CLC) recently warned that uncertainty, partly fuelled by the Ukraine conflict, has resulted in material suppliers issuing quotes with extremely short expiration periods, causing delays in contractors committing to projects. Joe Sullivan, a partner at MHA Moore and Smalley, noted that while the sector's confidence has been boosted by the easing of supply chain issues, the war in Ukraine poses a threat to this progress. The impact of the conflict and subsequent sanctions on Russia is yet to be fully realised, and supply chains must swiftly adapt to alternative sources for materials. Sullivan highlighted the Forest Stewardship Council's decision to remove timber certification from Russia and Belarus as an example of the changes contractors may need to make in sourcing their supplies, potentially impacting project timelines.

Sullivan also criticised the recent removal of the red-diesel rebate, deeming it illogical given the current circumstances. He expressed concern that, along with other inflationary pressures, the switch to white diesel could further strain construction firms, potentially leading to the failure of weaker companies. Small contractors interviewed by Construction News shared these concerns, stating that the removal of the rebate could jeopardise their businesses.

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