Construction Industry Costs

Construction Industry

I have been doing quite a lot of work with clients in the construction industry sector in 2022, and whilst anecdotally I had understood that costs have been increasing materially, I hadnt fully appreciated some of the percentage increases.

Whist rationalising the gross profit margins of clients who are now reporting their November and December and 2021 results, I looked at industry reports.

The chart below, prepared by the ONS compares costs in materials between Q1 2021 and Q3 2021:

Some of the increases are frankly frightening. In November 2021 the Royal Institute of Chartered Surveyors (RICS) reported that construction material costs had reached a 40 year high.

“Construction materials costs in the UK continue to escalate, reaching a 40 year high based on the annual growth of the BCIS Materials Cost Index.

Increased global demand in the construction sector, combines with the multiple and complex impacts of the pandemic and logistic issues, have resulted in unprecedented shortages, delays and ultimately, increased prices of materials and labour across the economy.

Within the UK, complications resulting from Brexit have exacerbated this situation, affecting all aspects of trade and labour availability. The repercussions are acutely impacting the UK construction sector.

Construction productivity has largely recovered from the initial shock brought by the pandemic and in some instances significant efficiencies have been achieved as a result of new working practices. However, over the summer, June in particular, a drop in productivity was reported due to sub-contractors self-isolating when contacted by the Test and Trace system.”

Most people will be aware of increases in oil prices – the final item on the list above. The increase of 22.5% was of course before the increases in 2022 – and more recently exacerbated by the Russia: Ukraine situation.

Something that has not been widely mentioned is the planned changes for the use of red diesel by the construction industry.

Red diesel is simply white diesel with one thing added and one thing excluded: red diesel comes with a dye, so that it can be identified. White diesel comes with extra duty of 46.81 pence per litre!

One of the biggest changes for construction industry users is that heavy plant and equipment of all kinds will no longer be able to run on red diesel when used for construction purposes.
This includes all non-road mobile machinery (NRMM), including excavators, dumpers and cranes.
The construction industry will also lose permission to use red diesel for commercial heating and power generation, for example when using mobile generators on construction sites.

As well as the financial implications there are a practical considerations too. Two of those being:

1. Certain plant and equipment might have both agricultural and construction usage. The rule changes apply to the usage rather than the equipment. Red diesel is still permitted for agricultural use, but not for construction. Therefore, fuel tanks need to be fully drained between transfer of usage.
2. Run down of stocks: Operators will want to ensure that they run down stocks and do not have to dispose of leftover red diesel. Operators of equipment that has dual usage, will need to ensure they have tanks for each type.

This seems to be a cost increase that has been hidden. Perhaps given the government are facing annoyance about domestic heating cost increases, general inflationary pressure, disapproval of taxes not being levied on the windfall profits being made by the big oil producers such as BP and Shell, this is something that they would prefer to keep quiet?