Spiralling materials costs pose threat to contractors

Skyrocketing materials prices will force contractors to rethink their contracts, industry bodies have warned. Last week, CJ reported that contractors face price hikes of up to 10 times the rate of inflation as manufacturers pass on escalating energy prices.

Materials prices rose by twice the rate of inflation in the first eight months of the year.
The construction industry is now wondering if it can absorb these increases, and appealing to the government for help.

National Federation of Builders director of operations Nigel Stubbings told CJ: “When you’re on very tight margins, any sudden increase in cost, whether it is staff or materials, is very hard to absorb. Materials companies have the same costs to bear, such as increased fuel, but they are looking at passing those costs on to the contractors, and the contractors haven’t anyone to pass them on to.”

Civil Engineering Contractors Association director Rosemary Beales told CJ current contracts put construction firms at risk. She said: “There aren’t many contracts under two years where we have fluctuation clauses. A lot of contractors are becoming exposed to risk.”

Beales called for greater flexibility from clients. She said: “I would like to see some recognition from clients that these costs are wholly unforeseeable and uncontrollable by contractors, and would like to see some consideration where there isn’t a fluctuation clause in place.”

The greatest price increases have been in materials such as asphalt, which is more prone to increasing oil prices. Beales said: “Civil engineering is generally more exposed by the structures it creates and the materials it uses.

“We’re most definitely going to be making a lot of noises with clients and government. We can’t be expected to carry these costs on our own.”

Jo Martin, executive director of the Royal Institution of Chartered Surveyors’ Building Cost Information Service, said sharp increases in materials costs have taken contractors by surprise.

He said: “Because prices have been so stable, and because of the desire to push risk to the contractor, there has been a move away from fluctuating contracts. With long-term contracts, contractors ought to be looking for some fluctuation clause on the contract.”

Construction Products Association economics director Allen Wilen warned that manufacturers are uncertain about future rises: “It’s very difficult at the moment to get a clear judgement about how much prices are likely to rise, particularly with the volatility we have seen.

“In terms of planning ahead, if you are putting in tenders in for next year, take into account that there are inflationary pressures coming through. If you’re bidding for fixed price contracts, take into account the level of cost may increase before you do the work.”

However, Beales warned contractors against second-guessing price rises. She said: “What contractors can’t afford to do is to speculate how those prices might rise. They need to be commercial when they bid and produce a realistic bid.”