Within a short amount of time, the Russia-Ukraine war has created the largest humanitarian crisis that Europe has seen in decades. An ongoing tragedy growing larger in scale, the total implications of this conflict have yet to be fully realized. Even so, one must consider what the fallout from these events will mean for the near future of the economy. Experts worldwide have begun to assess the current and potential consequences, with the consensus being that the global economy could be in trouble. This turmoil would undoubtedly trickle down to multiple industries, slowing down the operations of some and completely halting progress in others.
So what does this mean for construction?
As Russia’s invasion of Ukraine continues to unfold, analysts are predicting a domino effect of unfavourable events that will negatively impact the construction industry for the coming months – perhaps even longer.
The Biggest Impacts
The biggest impact expected thus far is a spike in prices for oil and gas. 2021 marked the beginning of the fuel crisis for Great Britain, triggered by a shortage of workers and an unmet demand for fuel that experts say was the combined aftermath of the Covid-19 pandemic and Brexit. This supply and demand discrepancy caused fuel prices to soar by October 2021, the highest they’d been since May.
Now, the Russia-Ukraine conflict has led to increased sanctions against the former in an effort to deter their advancement, setting off the potential of another disastrous outcome for petrol. With Russia being the third-largest oil exporter, the decision of Western nations to halt imports from the country is leading to an increased demand for oil from other producers. While the UK only imports about 6% of oil from Russia and is not solely dependent on the country for the commodity, it will be impacted all the same by inflation.
The beginning of a detrimental shortage, as well as drastic price increase, appears to be underway. Unleaded petrol hit a record high of £1.61 per litre on the 10th of March, 2022, having risen by 8p in a week, while diesel reached £1.70 per litre. According to The RAC motoring group, it is now costing over £88 to fill up the average petrol car – the most expensive it’s ever been.
Construction projects are predicted to suffer through increased production costs, delays, and work shortages, with those who still haven’t recovered from the previous fuel crisis to be in much worse shape. Large companies and individual contractors alike will be impacted, so contractors are being urged to take the necessary protective measures for the impending supply-chain disruption. In an interview for Construction News, Graham Robinson, global infrastructure and construction lead at forecasting business Oxford Economics, warns: “Contractors and their supply chains need to discuss their response. Higher prices need to be passed on as the sector can’t absorb any more increases.”
Robinson advised that inflation costs will need to be directly discussed throughout supply chains and with clients. He added: “If main contractors are squeezed in the middle, then it will have a direct impact on their levels of profitability and there are not huge margins on projects – I don’t think the slack is there to take up increased costs.”
In a separate interview for Construction News, Brian Berry, chief executive of the Federation of Master Builders (FMB) shared his insight on the circumstances the industry has been facing for the past two years, now worsened by recent events in Russia. He stated that:
“Over the course of the pandemic, material shortages and price inflation for building materials plagued the construction sector, often hampering local builders’ ability to deliver projects on time. As a result of Russia’s actions, supply chain disruption and the reallocation of certain types of materials will intensify the situation, with oil, steel, aluminium, timber and copper all set to be some of the worst affected.”
Describing the domino-effect this will cause, Berry added: “At a time when costs are surging, it puts builders in the unenviable position of having to raise costs for a customer base that are tightening their belts. Pragmatic policy delivery from the government to help ease pressures on the sector and consumers alike will be needed.”
In addition, energy prices are set to add to – if not, contribute to a large percentage of – the already growing inflation. Ofgem, energy regular for Great Britain, announced in February that gas bills will see an increase of 54% from April 2022, with £693 being the maximum rate that suppliers can charge for an average dual-fuel energy tariff. This puts more pressure on the construction industry due to the substantial use of Materials manufactured by energy-intensive processes, such as concrete, steel and cement.
Possible Solutions on the Horizon?
The Federation of Master Builders (FMB) has called for a cut in VAT on energy-efficient home improvements for Repair, Maintenance, and Improvement (RMI) activity for the period 2021 – 2025, which it says would reduce project costs and support builders and construction workers, particularly from smaller firms.
The FMB expects a cut on RMI activity to lead to the following:
- £51 billion total additional output in the construction sector and the wider economy
- £25 billion additional Gross Value Added (GVA) across the economy
- 345,000 additional full-time equivalent jobs in construction and beyond.
This move would cut the consumption of gas equivalent to 80% of Russian imports. Third Generation Environmentalism (E3G) said: “Combined with a renewables drive, which the Government has signalled it wants, Russian gas could be eliminated from UK supplies completely this year.”
Open communication and cooperation among industry leads, their teams, and suppliers appear to be the keys to efficiently managing the impacts of the war. Alex Vaughan, Chief executive of construction and engineering group Costain, is dedicated to supporting industry peers through experimental methods. He said: “We will resolve and overcome inflationary issues through a lot more collaboration. Where we can find savings by working together – improving interfaces, designing better solutions, delivering in a new way – we will come up with an upside to counteract the downside pressures.”
A Positive Outlook
Despite its setbacks, the construction industry is still predicted to experience growth this year, with infrastructure being the major driver. Construction Products Association (CPA) predicts a growth of 4.3% by the end of 2022, with a slight slow to 2.5% in 2023. In other growth news, the industry is likely still growing in opportunities from the ample job openings that were available from November 2021 to January of this year, when there were over 38,000 obtainable construction vacancies.