Energy prices are the latest headache for property as the sector weighs up build costs against development returns.
Construction costs were on the rise before Russia’s invasion of Ukraine, due to increased demand for projects following the pandemic’s first wave, energy price hikes and two years of supply chain disruption (p21, 08.04.22).
The sanctions and supply bottlenecks caused by the war have accelerated wholesale fuel price rises and the effect of a globalised materials industry will exacerbate the problem. Russian oil and gas account for just 8% and 4% of UK supply respectively, but demand for alternative energy sources across Europe will push up costs for everyone. This is particularly concerning for the cost of energy-intensive materials such as brick, cement and steel.
But there is some cause for optimism. The construction sector is in a relatively strong starting position: Office for National Statistics figures show output grew 2.4% between December 2021 and the end of February 2022. Still, developers must brace themselves for further price shocks.
There are strategies that will help. One answer is to implement productivity gains elsewhere, pursuing digitisation on site and deploying modern methods of construction. Careful selection of supply chain partners to reduce risks to cost and schedule will also be essential. Procurement and contract strategies will need to be more flexible, with clear mechanisms to factor in price fluctuation.
The industry must get the basics right – with clear and co-ordinated design, minimising potential for contractual changes, and a balanced approach to risk transfer.
Through Brexit and Covid, the industry has been forced to focus on alternative, more heavily scrutinised and resilient methods of procurement – and we will need that discipline more than ever in the coming months.
Martin Sudweeks, managing director, cost management, Turner & Townsend