Easing of COVID restrictions leads to commercial work boom
A ramp-up of work on commercial developments kept contractors busy in March, according to the Purchasing Managers’ Index (PMI).
The index attributed the growth within the commercial sector to an easing of coronavirus-related restrictions such as social distancing on site. As a result, many commercial developments that had been paused were restarted last month.
It marks the biggest output growth recorded in the sector since June 2021.
The index, compiled by IHS Markit and the Chartered Institute of Procurement & Supply (CIPS), measures construction output across commercial, civils and residential sectors. Each sector is given a score. A score above 50 indicates that activity is expanding, while below 50 suggests it is slowing.
Overall, the index registered a score of 59.1 in March, which is the same as the February reading.
The commercial sector scored 60.8, while growth was also recorded in civils (56.3) and residential work (54.9).
The index also reported that orders across the sector increased in March to achieve their best performance since August, thanks to strong customer demand and a rise in tender opportunities.
But increasing fuel prices and insecure supply and demand in the sector pushed costs up in March, to their highest level for six months, according to the index’s analysis.
Lloyds Bank’s infrastructure and construction team leader, Max Jones, said the sector was navigating the challenges posed by inflation “relatively well”.
“While labour and materials price increases show no signs of slowing, contractors are taking innovative approaches to deal with them,” he added.
“Many are investing in their people and culture, so they are more competitive in the labour market, and can attract and retain talent better. On the materials side, bigger contractors are picking up with clients to share some of the cost where possible, whilst doing their best to manage the challenges posed by cost inflation with their supply chain.”
PwC creditor markets lead Lucy Fulmer said: “March’s results build on an increasing optimism within the industry, with a continued rise in the UK’s construction output. Clients are reporting that sales are strong and order books full, as mirrored in today’s statistics. However, the unprecedented cost inflation issues – including materials, labour, haulage and energy prices – are impacting on net margin.”
But the outlook for the sector has taken a nose dive, which analysts have attributed to concerns over the war in Ukraine, severe cost inflation and a worsening global outlook. Optimism in the sector is now at its lowest level since October 2020.
Scape chief executive Mark Robinson said: “The conflict in Ukraine has further strained existing supply issues, while the rising cost of energy is clearly unsustainable for those managing tight margins.”
“As such, the timing of [the] government’s energy security strategy, due tomorrow, will be much welcomed,” he added. “While contractors will no doubt have one eye on the significant infrastructure investment it promises, the majority will be hoping to see more immediate policy intervention that helps them to stabilise delivery costs and provide greater certainty when tendering for work.”
Last month the Construction Leadership Council (CLC) warned that uncertainty caused partly by the war in Ukraine meant that material suppliers were issuing quotes that expired within 24 hours. The body said this was delaying contractors from signing up to projects.
Joe Sullivan, partner at accountancy firm MHA Moore and Smalley, said the easing of supply-chain issues had boosted the sector’s confidence, but the war in Ukraine would probably put this “in jeopardy”.
“The true impact of the war and resulting sanctions on Russia will take time to materialise and, as such, certain supply chains must swiftly pivot towards other sources for their materials.”
Sullivan highlighted a move by the Forest Stewardship Council (FSC) to remove certification of timber from Russia and Belarus as an example, because contractors will need to look elsewhere for timber supplies, which could have an impact on their projects.
He also criticised the removal of the red-diesel rebate last week, calling it “illogical in the current climate”.
“Whilst the 5p reduction in fuel duty mitigates the cost increase [that] construction firms will face, the switch to white diesel on top of other inflationary pressures will heighten concern that weaker companies will fail,” Sullivan said.
Construction News spoke to small contractors, who warned they could be pushed out of business by the removal of the rebate.