Construction sector expects further year of cost pressures and market uncertainty

    The latest CEF Construction Survey reflects a local construction sector that remains busy in terms of current workloads – but also a sector where immediate to medium term cost pressures prevail alongside a growing pessimism about market opportunities over the coming year.

    The survey, which collected data from NI-headquartered firms which have a collective annual turnover of approximately £2.5bn, covers the last six months of 2022 and reflects on many of the key challenges that contractors, civil engineers and homebuilders are currently facing.

     The main findings included:

    • Looking at 2022, 50% said their profit margins had worsened or significantly worsened in comparison to 2021. Over the same period, 20% had seen an improvement in profit margins.
    • 62% of respondents do not expect their annual turnover to increase in 2023. Indeed, some 43% are looking to consolidate their business over the coming 12 months – with 27% looking to increase profitability.
    • 67% of firms said they were either at full or almost full capacity. Only 7% currently had capacity for significant levels of new work.
    • Materials availability challenges have receded – 80% saying any issues are now manageable.
    • Inflationary issues remain – 63% of respondents said these were continuing to pose serious financial concerns and 85% said they expect material costs to continue to rise.

    On existing public sector supports – since the introduction of PAN 01/21 in August 2021, at least £21.5 million has been paid out to firms on existing public sector contracts to help with inflationary pressures and materials delays, and on future public sector projects – 81% wanted to see alternative forms of contract, specifically two-stage tendering, brought in for public sector works such as new schools and healthcare facilities, while only 13% of respondents see increased public and private sector opportunities in Northern Ireland in 2023. Some 60% see the local market declining further in activity.

    Mark Spence, Managing Director of the Construction Employers Federation, said of the results: “The results of our Construction Survey detail the resilience of Northern Ireland’s contractors and homebuilders in the face of the never-ending pressures of the last number of years. Current workloads remain strong, and many have grown their businesses by diversifying into other markets and sectors – showcasing the innovation and talent of the firms, their employees and supply chains across the UK, Ireland and beyond.

    Material Costs

    “In tune, however, with other recent surveys such as the Ulster Bank PMI, this positive picture is weighed down by the relentless impact of materials cost inflation over that period which is making sustainable profitability in the sector nearly impossible to achieve. This shows no signs of improving into 2023 and when you factor in the significant pessimism within our membership as to new opportunities going forward, we know that a difficult 12–24-month period lies ahead.

    “Now more than ever we need our political institutions restored to engender much needed confidence within the industry. While a Northern Ireland Executive can in no way be a panacea for many of the challenges that we face, this survey reinforces the benefit of collaborative working between public and private sectors.

    “Over an 18-month period since the introduction of the PAN 01/21 Material Cost Assistance measure that CEF negotiated with the Department of Finance to mitigate against the difficulties of material shortages and cost increases, our members have reported an at least £21.5 million benefit to the public sector projects they have been working on. This has ensured project and contractor viability across huge swathes of government activity and has only been achieved where our members and their clients have worked together in the spirit of openness and transparency.

    “This type of dialogue must be the model going forward and is, as the evidence has very clearly proven, the only way in which we can jointly meet the challenges we are faced with over the coming years.”

    Severely Tested

    Richard Ramsey, Ulster Bank Chief Economist, Northern Ireland, commented: “Survey evidence and official statistics confirm that the local construction sector is front and centre in the current downturn.  Last year Northern Ireland’s construction industry underperformed against other sectors and its peers in the rest of the UK and the Republic of Ireland.  In the face of unprecedented supply-chain disruption and inflationary pressures, the resilience of local firms has been severely tested over the last two years.

    “Planning, procuring and pricing work over this period has been extremely difficult. Fortunately, cost pressures and building material shortages have begun to ease from their extreme levels. How this evolves in 2023 will be influenced by two key factors – the war between Ukraine and Russia and China’s economic recovery. The lifting of Covid-19 restrictions there is expected to see a surge in economic growth from Q2 this year. This would provide a new source of inflationary pressures on energy, commodities and building materials.

    “The construction downturn is particularly marked within housing with activity down almost 15% y/y in Q3 2022. Outside of the first lockdown, back in Q2 2020, housing activity plumbed a 7-year low in Q3 2022. Housebuilders should see a significant easing in supply-chain disruption for building materials as demand falls. But the cost of living crisis and rising interest rates will hit housing affordability and demand. 2023 is set to be a more challenging year as concerns over supply-chain difficulties and inflation give way to weakening demand. There is also an over-supply of office space, pressure on capital spending budgets, and impediments such as inadequate infrastructure to enable development.

    “Recovery from the current downturn requires a strong effective working relationship with government. This is particularly important as the construction sector responds to the demands of tackling the climate emergency. Given the cost-of-living crisis, energy efficiency is more important than ever. The lack of a functioning Executive makes this task more difficult.  If and when an Executive does return to Stormont, the construction sector will find it is competing with multiple stakeholders to get its voice heard.”