Inflation alert for 4 key industries (and 3 ways to lessen the pain!)

Have you heard about the construction cost inflation? What about the manufacturing inflation? It doesn’t stop there either...

Whether you have or you haven't, the construction, manufacturing, engineering and haulage industries are currently experiencing unprecedented inflation! From broken supply chains and skyrocketing material costs to a serious labour shortage and an increase in demand, the Brexit-Covid aftershocks are still threatening to put firms out of business and people out of work.

This is a serious problem which, if left untreated, could lead to irreparable damage. To prevent this, here is everything you need to know about the spiralling inflation, including how you can lessen the strain on your business.

General inflation in the haulage, engineering, construction and manufacturing industries

What is actually causing this construction inflation/ manufacturing inflation? And how bad is it really?

  • The initial covid lockdowns drastically reduced the output from factories, yet the demand for building materials increased as many people took on home improvement projects while stuck at home. It wasn't just homeowners either - many restaurants took this shut down period as an opportunity to renovate.
  • This effect has been compounded by the covid travel restrictions and isolation requirements, as many manufacturers could not run at full capacity for most of 2020 and 2021. This has led to a shortage of key materials.
  • Shipping container costs have more than quadrupled from this time a year ago! This has caused many shipping companies and raw material suppliers to pass on the costs of increased administration to ship between the UK and Europe.
  • Uncertainty around Brexit has caused major delays in imports. Since 60% of imported materials are used in UK construction projects, this has delayed the vast majority of projects in the construction industry.
  • Imbalanced supply and demand has caused material prices to skyrocket! Cement prices have risen by 30% in the past year; the same goes for steel (increased by 38%) and timber (29.8%). This has caused many businesses to continue working on extremely low margins where they continue to lose money on each project.
  • Covid has meant that many businesses have had to let staff go. Together with Brexit causing thousands of EU migrants to return to their home countries, the U.K. is now suffering from a labour shortage. E.g. the demand for construction workers is almost at a 20-year high.
  • Demand continues to rise which has caused a significant increase in wages. Not only that, but these costs are now being passed onto the trades, manufacturers and construction companies.

This is NOT a short term problem

Unfortunately for these industries, this inflation is not looking like a temporary issue.

Companies and suppliers continue to struggle to meet increasing demand due to Covid and Brexit. Even after 18 months, they are still suffering from extended lead times, a wide-scale shortage of key materials, labour issues, and difficulties in transporting products.

As we've learnt from past experiences where there was serious construction cost inflation and manufacturing inflation (e.g. the financial crisis in 2008), it may take a couple of years for these rates to fall.

While supply chain issues should eventually be resolved, in the next 6 months, “we expect supply of inputs to remain a constraint on production and a source of upward pressure on prices,” says Citigroup economist, Andrew Hollenhorst.

“Input prices are clearly rising across manufacturing sectors with most firms reporting higher prices paid for raw materials,” he added. “Some of this may be absorbed by firms compressing profit margins, but we expect some higher input costs to be passed through to consumers resulting in higher consumer goods inflation.”

How can you lessen the pain for your business?

Construction inflation and manufacturing inflation is continuing to rise, BUT your business doesn't have to suffer. Here are some steps that contractors and owners can take to lessen the pain while the going gets tough:

  1. Be smart with your projects.

What we mean by this is, how can you mitigate the risks of construction cost inflation and other issues such as extended lead times? You could:

  • Save money on each project by improving your material management.
  • Provide project owners with timely and credible third-party information about changes in material costs and supply-chain issues (or anything else that will impact the cost and completion time for a project).
  • Fix prices as soon as possible and add price-escalation clauses to your contract to account for construction inflation. These can protect both parties from unanticipated swings in materials prices.
  • Renegotiate some of your long-term contracts if they are no longer profitable or sustainable on the current terms.
  1. Consider sourcing your materials from UK-based suppliers

If the manufacturing inflation or extended lead times are your main issue, look into what you could source within the U.K. This may not solve all your problems but it does get around the supply chain delays and costs at the EU/UK borders!

  1. Get an accountant to help you through these changes

Accountants can do so much more than file taxes every year, they can help you navigate through this difficult period! All it takes is an analysis of your current cash flow and adapting your business model to ensure that you're making sustainable decisions over the next year.

An accountant can help you to:

  • Check the health of your business and plan for the future.
  • Know exactly how much cash you are burning and how long you can sustain this.
  • Alter your sales price so that you're in line with your competitors.
  • Start pricing projects correctly (and account for the inevitable changes).
  • Forecast your pipeline.
  • Save money by improving your processes and reducing material waste.
  • Start managing your budget effectively.
  • Thrive, not just survive, during this period.

If left unchecked, rising inflation could negatively impact your business...

There is no denying that construction inflation and manufacturing inflation is causing further pressure in their respective industries. BUT, with that being said, there will be an end to it at some stage. You just have to navigate through this difficult period as best as you possibly can.

While no single or simple solution will resolve the situation, there are steps that contractors and owners can take to reduce the impact and pressure on their business. Namely, being smarter with current and future projects and seeking expert advice from a finance professional.