Much has been said in recent months about the extraordinary, once-in-a-generation chance Italy has to kickstart its faltering economy thanks to the EU’s Recovery Fund, of which it is getting the lion’s share.
Things are off to a promising start, with estimates for the country’s GDP growth coming in at between 6% and 7% for 2021.
But a massive threat to this recovery looms. Over the past few months, the construction sector – one of the industries leading Italy’s rebirth (48% of Recovery Fund money will be spent on construction) – has been hit by a drastic rise in commodities prices.
This sharp increase in the price of raw materials has kickstarted a vicious cycle that is paralysing Italy’s construction industry, which is now desperately seeking solutions to avoid coming to a total standstill only a few months after business started up again. At present, construction firms are faced with the reality of losing their margins or taking steep losses on ongoing contracts signed pre-spike.
Iron prices are at an all-time high, having increased by 243% over the past nine months, but this is just the tip of the iceberg. There is a long list of construction materials whose prices have spiralled out of control. For example, the price of copper has increased by 21.63% since January 2021, aluminium has gone up by 35.67% and lithium has shot up by 98.92%.
What is needed is a long-term action plan to safeguard Italy’s construction industry, which is so essential for its economic rebirth
These price rises have caused deep concern for construction firms and developers alike, and are joined by two further issues that are just as significant: the lack of manpower (the sector needs to add 265,000 jobs just to meet current demand) and the difficulty in price-adjusting contracts that are already under way.
The rise in raw materials prices is clearly linked to the Covid-19 crisis, which has caused enormous supply chain issues due to global closures. This, coupled with the rapid uptick in demand in recent months and pressures on the logistics market, has created the perfect storm.
The materials crisis is affecting both public and private sectors alike. In the public sector, where iron and steel are particularly important for infrastructure projects, the Italian government finally responded to mounting pressure and, in recent weeks, introduced pricing review mechanisms for public contracts with the goal of managing exceptional price increases in H1 2021.
Construction firms will be compensated for the additional sums spent on materials during the period, with reimbursements made against a benchmark for the semester. Price increases must exceed 8% for offers made in 2020 and 10% for offers made in the previous years.
This compensation will be financed using 50% of the sums specifically set aside for unforeseen circumstances in the budget for each project (if these are not already committed elsewhere). An additional €100m fund was also set up for this purpose.
Systemic shift
While H1 2021 is covered, what will happen in H2 2021 and beyond is still unclear. This is a source of great worry for industry players, as at present they are unable to properly budget for work that is under way or indeed to plan for the future.
Given that the price increase is not a temporary spike but a systemic shift in the market, it is paramount that a long-term revisional mechanism is introduced and that public sector clients increase their price lists to meet current market conditions. If this does not happen, contractors will no longer be in a position to tender for work in the Italian public sector.
On top of this, one of Italy’s key measures for the private sector is at risk of catastrophic failure due to the spike in raw materials prices. The so-called ‘Superbonus 110%’ was introduced last year to incentivise homeowners to carry out energy efficiency projects on their properties.
Under the scheme, 110% of money spent is deductible, making these projects zero-cost initiatives for owners even when fees are accounted for. It is both a great way to bring private properties in line with Green New Deal emissions targets and a strong boost for the construction industry.
However, the lack of commodities such as scaffolding and the resulting cost increases together with a scarcity of manpower have slowed down the execution of these works, putting the entire measure at risk.
In fact, the Superbonus 110% will expire at the end of 2022 so, given that no intervention on price increases is planned in the private sector, it is essential that the scheme is extended by at least a year to allow companies enough time to carry out work in these difficult circumstances.
It is becoming ever clearer that what is needed is a long-term action plan to safeguard Italy’s construction industry, which is so essential for its economic rebirth, as well as the small and medium-sized businesses that are the backbone of the Italian economy.
Angelica Donati is chief executive of Donati Immobiliare Group
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