Industry remains upbeat despite September growth slowdown

Monthly PMI shows that shortages of materials and staff held back construction recovery in September.

The construction industry remains upbeat about the future despite the current shortages of materials and staff that slowed down recovery in September.

The latest monthly PMI survey found that output growth eased for third month running, sub-contractor charges increased at a survey-record pace, and widespread supply shortages lead to rapid cost inflation.

September data revealed another growth slowdown in the construction sector, with output volumes rising to the smallest extent for eight months. Survey respondents also cited disruptions on site from unavailable transport, a severe lack of materials and continued staff shortages.

A rapid drop in sub-contractor availability was reported in September. Imbalanced demand and supply contributed to the steepest rise in sub-contractor charges since the survey began in April 1997. 

At 52.6 in September, down from 55.2 in August, the headline seasonally adjusted IHS Markit/CIPS UK Construction PMI® Total Activity Index dropped further below the 24-year high seen in June (66.3). The latest reading signalled only a moderate expansion of total construction output and the weakest speed of recovery for eight months. 

All three broad categories of construction activity saw a loss of momentum in September, with the biggest slowdown seen in civil engineering (51.0, down from 54.8 in August).

House building also decelerated in September, with the latest expansion the weakest since the recovery began in June 2020 (52.8). This left the commercial segment (53.6) as the best performing category during September. 

Construction companies recorded a moderate increase in new work during September, with the rate of growth easing sharply to its weakest since the start of 2021. The slowdown was linked to hesitancy among clients and less favourable demand conditions.

A lack of sub-contractor availability added to the squeeze on labour supply in September. Shortages of sub-contractors also led to additional cost pressures, with rates charged for sub-contracted work increasing at a survey-record pace.

Purchase prices increased rapidly in September, although the rate of inflation eased further from June's all-time peak. Around 78% of the survey panel reported a rise in their cost burdens, which was mostly linked to supply shortages and transport surcharges.

Meanwhile, the latest survey illustrated that construction firms remained highly upbeat about the business outlook. Just over half (51%) forecast rising output, while only 8% anticipate a decline. However, the degree of confidence was weaker than August amid some concerns that the supply chain crisis will hinder growth. 

Tim Moore, director at IHS Markit, which compiles the survey said: "September data highlighted a severe loss of momentum for the construction sector as labour shortages and the supply chain crisis combined to disrupt activity on site. The volatile price and supply environment has started to hinder new business intakes as construction companies revised cost projections and some clients delayed decisions on contract awards. As a result, the latest survey data pointed to the worst month for order books since January's lockdown.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "Construction activity suffered another setback in September, as builders were hammered by staff and material shortages, delivery delays and higher business costs as this phase of the post-pandemic recovery became the shakiest for eight months. Unless stronger supply chain performance is nailed down along with headcount, we are heading towards a stagnant autumn because the sector is certainly not on an even footing at the moment."

Matthew Farrow, director of policy at the Association for Consultancy and Engineering (ACE), said: “Autumn is here and the figures have not substantively improved. As in many other sectors we are facing the spectre of rising people costs as well as delays and inflationary pressures on materials. This is a potent combination which will hold back post-pandemic recovery in both the construction sector and the wider economy. Despite these challenges, the fact that respondents remain largely upbeat with a positive business outlook is good news. It remains to be seen whether this withstands the next few months of 2021 which are unlikely to see any substantial change in the circumstances we are working in.”

Mark Robinson, group chief executive at public sector procurement specialists SCAPE, claimed that spending on public sector projects will be critical to maintaining industry confidence and generating economic growth. He said: “The winter months are likely to be challenging for the construction industry, despite these latest figures and renewed emphasis being placed on the government’s ‘Build Back Better’ ambitions this week. Public sector spend will continue to play an important role in maintaining confidence and setting the standard in terms of managing risk across the supply chain should inflationary pressures persist. In addition to rigorous scenario planning through procurement, developers – public and private – will need to encourage open dialogue and prompt payment practices to support the health of our supply chains, who will ultimately be the engine room of any growth this winter.”

Jan Crosby, head of infrastructure, building and construction at KPMG UK, said: “Global supply chain delays, lorry driver shortages and the demand on fuel are causing havoc here for the UK’s construction sector, which is having to navigate these challenges alongside managing pent up pressure for builds.

“While some companies have been agile enough to handle these issues by stockpiling or widening their sourcing net, others have understandably struggled, which has led to projects being cancelled or delayed. That’s why another month of slow growth is to be expected given the circumstances. The sector is in desperate need of a rebalance. But for now, the industry is impressively responding to these complicated conditions.”

Max Jones, director in Lloyds Bank's infrastructure and construction team, claimed the coming months will be a test of which contractors have been managed well throughout the pandemic as they adjust to life without government support, especially as materials shortages take hold.

"What will become clear as we approach the end of the year is how well firms managed throughout the pandemic and which ones are best placed to weather the headwinds that will affect the wider economy and will reap the rewards of continued high levels of demand,” said Jones. "Labour, energy and materials shortages are straining contractors. Taken individually the sector would be well-equipped to handle these supply issues, but collectively they threaten to slow the recovery just as businesses should be eyeing up growth. The industry is also facing into a skills vacuum. For now contractors are papering over the cracks by paying more to bring in and retain skilled workers to ensure projects remain on track, but the worry is that this could create a long-term wage inflationary issue for the industry."

Nick Pinder, partner in Eversheds Sutherlands construction and engineering team, said: “Another fall in the UK Construction Purchasing Manager’s index is a blow for the construction industry and a concerning trend. Cost increases, coupled with labour and material availability issues, show no signs of abating which presents a particular challenge for contractors. We are already seeing an uptick in disputes on projects that have become distressed as a result of the pandemic, and it is evident from the latest news that there is no let-up for those involved in the delivery of construction projects.”

Meanwhile, modular housing specialists TopHat and Etopia were amongst those who stressed the urgent need for the construction industry to embrace modern methods of construction as part of a successful post-Covid green recovery. 

Andrew Shepherd, managing director at TopHat Solutions, said: "Inflationary price rises, caused by a severe lack of materials, means there is an urgent need to overhaul how the industry procures and manages supply chains if the UK is going to build back better and deliver on the government's housing targets. Thanks to offsite manufacturing, companies such as ourselves can provide our partners in the supply chain with greater certainty over orders, as our factory's production line needs to be constantly fed. By being more predictable and forward-looking, modular housebuilders will be able to provide partners with the certainty to grow and invest."

Joseph Daniels, CEO and founder of modular housing and technology company Etopia Group, and also an independent adviser to the government on decarbonising the construction industry, said: "As the global economy gets back on its feet, formidable supply chain pressures are to be expected. Tighter supply chains mean that the UK's construction industry now has to reflect on how it uses, and discards, of waste. Innovation will be key in solving this by providing a means to which companies can precision-engineer homes along production lines using the exact amount of materials required for each build. Much like car manufacturing, MMC uses standardised processes, so every single home that is created in factories, such as ours, uses the exact same amount of materials. Technology will help drive such efficiencies - it's time construction embraces it."

PMI data was collected between 13-29 September 2021.

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