Construction PMI: Supply chain squeeze and cost-surge increases pressure on contractors says RSM UK

A prolonged period of gradual improvement for the UK construction sector since Q3 2021 is now in reverse. Surging inflation and rising interest rates are placing more acute pressures on margins for businesses as material prices increase and supply chains are squeezed once more. Continued labour shortages will also exacerbate those increasing challenges.

According to the latest PMI data by IHS Markit and CIPS, March PMI business activity remained strong with no change, but wider index numbers decelerated across the UK construction sector. Input prices increased up to 88.7 in March, up from 79.4 in February, with supply delivery times increasing to 33.5 from 32.9 respectively.

Kelly Boorman, partner and national head of construction at RSM UK, said: ‘After a period of steady recovery and alleviated supply chain pressures, the construction pipeline is once again experiencing a squeeze on supply and labour demands, exacerbated further by the cost-of-living crisis, with businesses absorbing inflated material costs and reducing their profit margins.

‘We are yet to see the full impact of the emerging supply chains crisis. Businesses continue to review fixed cost contracts and have been seen stepping away from tendered projects where increased material and labour costs cannot be re-priced under the existing contract terms. Many businesses are pessimistic about future activity over the coming months, with uncertainty around rising prices and extended supply delivery times impacting an already low margin industry, which looking longer term, is not sustainable.

‘In contrast, the housing market remains buoyant and is driving a significant amount of business activity in the sector. Buyers are active in wanting to get ahead of further interest rate hikes and rising inflation later in 2022.’

Thomas Pugh, economist at RSM UK, added: ‘The construction sector is at the forefront of the supply chain crunch that is likely to increasingly impact other sectors of the economy over the next few months. Indeed, the war in Ukraine and Covid-related lockdowns in China mean supply chains are likely to come under renewed stress over the rest of this year before they have even recovered from the pandemic.

‘And while we aren’t currently forecasting a recession in the UK, a rise in oil prices back to around $130pb or renewed supply chain disruptions that hobble the manufacturing and construction industries would be triggers for us to revise down our economic forecast. At the very least, rather than marking a return to normality after the challenges of the pandemic, 2022 is likely to be another extremely challenging year for the middle market.’