Brian Berry, CEO of the Federation of Master Builders reflects on the mounting problems for SME house builders
Before the FMB, Brian worked at the Royal Institution of Chartered Surveyors (RICS) where he was Head of UK Public Policy. Brian regularly provides commentary on construction issues for TV, radio, national and trade press.Small and medium-sized (SME) house builders are deeply concerned about rising costs and the impact this could have on their businesses in both the short and longer term. Small house builders are seeing costs increase not in just one or two areas, but right across the board. Material prices are rising steadily and it is the same story for prices of key equipment such as skips. [pull_quote]SME house builders are also contending with a rise in the price of diesel.[/pull_quote] Added to that, and due to the much-documented construction skills shortage, the cost of hiring skilled labour is also increasing. Cumulatively, these price increases represent clear challenges to the profitability of smaller house builders.
It is imperative that the number of SME house builders making losses on projects does not further increase as this could result in large numbers going out of business. This would impede the Government’s ability to meet its house building targets and have a very negative impact on the wider economy.
More than half of construction SMEs report that rising material prices are squeezing their margins. Materials started to increase in price in June 2016 when sterling depreciated in value following the EU referendum. High demand due to buoyant international markets could also be contributing to price increases since that time.
This problem is likely to get worse before it gets better with the FMB’s latest State of Trade Survey for Q4 2018 showing that 87 per cent of construction SMEs are expecting material prices to rise further in the next six months.
Three quarters of construction SMEs think that the price of skips rose in the 12 months to the end of September 2018 and this is a further problem for smaller firms. The average cost of an eight-yard skip increased by £24 over that period, meaning an additional cost of £72 for the average new build home.
Furthermore, the widely-reported increase in diesel prices is also impacting on the profitability of construction SMEs. Nearly half have made lower margins on projects because of this and more than one in ten have had to turn down jobs they would have normally accepted as they are too far away. Although alone the increase in diesel prices does not have a drastic impact on contractors and developers, when margins are already squeezed to such an extent via other factors, even small price increases in diesel give cause for concern.
The construction skills shortage is one of the most problematic issues for the sector currently. Nearly two-thirds (64%) of construction SMEs are struggling to hire carpenters. The number of firms reporting problems hiring bricklayers is nearly as high (61%). 43% reported difficulty finding plasterers. Naturally, this scarcity of tradespeople means that when construction employers can find people, they are paying inflated wages in order to keep them and this is putting further pressure on margins. With Brexit potentially imminent, this problem is predicted to get worse still with two thirds (66%) of firms forecasting that wages will increase over the next six months.
The sector is therefore extremely concerned that the Government has accepted the recommendations in the recently published Migration Advisory Committee (MAC) report. The MAC report proposes a post-Brexit immigration system that diminishes the ability of low skilled workers to enter the UK. The definition of low skilled also leaves much to be desired as it would include all Level 2 tradespeople. This would be catastrophic for the UK construction sector and would make the Government’s house building targets unachievable. [pull_quote]Post Brexit, the UK’s immigration system must be needs-based and allow our most productive sectors to continue to flourish.[/pull_quote] The Federation of Master Builders, along with many other business groups, is calling on the Government to rethink its adoption of the MAC report recommendations and implement an immigration system that provides the construction industry with the labour it so desperately needs. With rising costs for SME house builders, the last thing we need is further pressure on salaries due to a dramatic drop in migrant labour.