The Impact of COVID-19 on the UK construction market

By Rushton International, August 25th 2020

And why now more than ever it is prudent to review Buildings & Material Damage Sums Insured.

The Global pandemic has had an unprecedented impact on the UK construction market, with the industry recording its worst slump in more than two decades last month, as many builders shut down their sites. According to research by IHS Markit – the construction activity index fell from 39.3 points in March to 8.2 points in April, the lowest since the figures were first collected in April 1997, and lower than the previous record low of 27.8, in February 2009 at the height of the financial crisis. On top of this reduction in activity, the impact of the covid-19 pandemic is also causing productivity losses for operational sites.

The issue however is not just on construction sites where there is now; more regulation, a change of operating procedure, staff absences, and in some cases suspension of activity altogether. Difficulties are also caused off site in terms of the administrative and professional side of the industry, with issues being created by office staff unable to work collaboratively or even at all from home.

Other offsite issues are in manufacture, fabrication and supply, again due to staffing problems in factories/warehouses, but also further supply chain disruptions down the pipeline. The impact has been a general increase in cost and delay Supply side, through;

Labour Shortages;

The combined reduction in directly employed and self-employed workers results in a 9.9% expected reduction in workers by September 2020.

Productivity Losses;

Using data from 70 medium-sized UK construction projects, Suiko modelled that a £20m commercial real estate project with an 81-week programme before the pandemic would typically suffer productivity losses of 20%. Now, a project of this scale, is seeing this rise to 35% productivity losses with project completion delays of up to 32 weeks and increases of around £600,000 in preliminary costs alone.

Supply Chain Issues;

The closure of builders’ merchants and manufacturing stoppages led to widespread shortages of materials. About three-quarters of construction companies reported longer delivery times from suppliers. According to Building.co.uk;

  • Concrete works lead times have risen one week to 11 weeks.
  • Structural steel frames lead times remain at 17 weeks, with workload and enquiries unchanged from six months ago.
  • Cladding – natural materials, lead times remain at 39 weeks. A rise in lead times is forecast due to closure of manufacturing facilities.
  • Cladding – metal panelised system lead times have risen two weeks to 52 weeks and are expected to go higher due to potential labour issues and some suppliers increasing procurement periods.
  • Roof finishes – asphalt/membrane lead times have risen by one week to eight weeks.
  • Roof finishes – profiled metal stays at 15 weeks, despite lower workload and enquiry levels. No changes in lead times are anticipated.

On the Demand side however there has been a reduction in contracts available due to the global uncertainty created, making competition for work greater. Research by Build UK shows;

Pre-coronavirus between July 2019 and March 2020, the number of contracts awarded each month averaged 587. In July 2020, there were 430 contracts awarded, which was a slight improvement on the 415 contracts awarded in June, but 27% below the average and 30% less than in July 2019. There was a modest increase of 15% in the number of tender opportunities, up from 303 in June to in 349 in July. However, this is still 49% below the monthly average of 682 projects available for tender between July 2019 and March 2020 and 60% lower than July 2019. At present, there are just 162 tender opportunities available until the end of October 2020, according to Builders’ Conference.

As yet we have not seen much evidence of costs being passed on to consumers. As the indices from the Royal Institution of Chartered Surveyors (RICS) shows;

The Tender Price Index of the Building Cost Information Service (BCIS) of the RICS shows no change over the last 12 months, in contrast to previous forecasts from 3Q2019 to 3Q2020 of c.4%, with BCIS’s General Building Cost Index showing a slight increase over the last 12months and around 0.5% since March this year.

Furthermore, as much as “we are all in this together” some are more in it than others, as the impact is also both regional and sector specific;

Regional Variation – can have a major impact on reinstatement cost and now more than ever due to localisation of lockdowns and the unique impact on specific site locations. Over the last 12 months regional variance has changed by c.-5% in some of the Home Counties, to c.+6% in parts of Wales. Since March 2020 some London boroughs have fallen by c.5%, with areas of Northern Ireland increasing by c.4%.

Sector by sector – in terms of the major key sectors; Retail, Offices, Industrial, Healthcare and Education have all performed differently compared to other market cost indicators such as the TPI and GCBI indices, and therefore properties need to be assessed on their own individual merit more so than ever, with less reliance placed on general indexation.

It should also be borne in mind that these indices are only provisional/forecasts due to the time required for the analysis to filter through the system, and may not be showing a true picture currently and thus there may be a correction in the future as the situation evolves and contractors respond.

The market is in an extremely turbulent position and the fundamental takeaway from the above is that it is more prudent than ever to ensure that Current Sums Insured are accurate and that professional valuation advice is sought.

As highlighted the issue is not just one of construction cost, which has a direct impact on Declared Values but a time issue, impacting Reinstatement Periods and therefore Inflationary Provision. The compound impact of the two combined means Current Sums Insured will need careful review.

Rushton International continues to monitor the situation and offer advice and valuation services to our clients to provide some confidence in these turbulent times. We would be delighted to discuss any issues in detail and we are able to undertake either site based or enhanced desk top valuation services.

For Buildings, Civil Engineering, Civic Infrastructure and General Real Estate enquiries please contact;


Andrew Reed MSc MRICS MCABE

Associate Director and Head of Buildings
andrew.reed@rushton.co.uk
07904 974 964
or

Gareth Williams BSc MRICS
Director
Gareth.williams@rushton.co.uk
07788 188847

Please also be aware of our HealthCheck and Advice Centre available during the AIRMIC virtual conference.

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About Rushton International

Rushton International is an independent and impartial asset valuation and advisory firm. We specialise in the valuation of plant, equipment and buildings for insurance purposes. With our team of qualified and accredited valuers, we have the experience, qualifications and expertise to value any asset, anywhere in the world.

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