Last reviewed 16 December 2021

Shortages of materials, supply chain problems and a lack of skilled workers are causing acute problems in the construction industry. Roland Finch looks at what has caused the current situation and steps that might be taken to resolve it.

Introduction

During 2021, many building contractors, subcontractors and suppliers reported difficulty in sourcing construction materials, in particular cement, plaster and plasterboard, steel, timber, bricks and blocks. There have also been shortages recorded of things like electrical components, plumbing supplies, sanitaryware and paint.

To compound the problem, even where materials have been available, supply chain issues, such as those associated with a lack of delivery drivers, have also hit the headlines, meaning longer lead-in times for some basic products.

As if things couldn’t get worse, this is on top of ongoing widely reported skills shortages. The Construction Industry Training Board estimates that almost a quarter of a million new workers will be needed over the years 2021–2025 just to replace the ones who are leaving the industry.

And finally, increases in the cost of fuel and energy have a knock-on effect on the costs of production, transport and delivery of all the others.

The causes

The reasons for materials shortages are many-fold and complex; some people have cited Brexit, reduced availability of shipping containers, reduced production of manufactured goods, lack of HGV drivers and associated training and testing facilities, and even shortages of carbon dioxide, which ironically is one thing that everyone is trying to get to “net zero” for a different reason!

But there is probably one overriding event which has tied all the others together; the global Covid-19 pandemic.

This has meant a world-wide slowdown in activity, both production and shipping, while anecdotally, as well as those who are unavailable due to the virus itself or self-isolation, many workers have been re-evaluating their careers while on furlough, returned to the EU after Brexit, or simply left the industry for other reasons.

At the same time, there has been a mini building “boom” caused by people taking on home improvement projects during lockdown, meaning there are potentially more demands.

It should be noted, however, that it is always difficult to establish the precise causes of workers being unavailable in every case. We do not know, for example, what every person’s reason for leaving the industry is, because undertaking surveys and getting responses from people who have left is notoriously difficult, and in any event it is more likely to be a combination of factors.

The effect on projects

The main consequences are relatively simple and obvious to identify; reduction in quantity usually means higher prices, following the basic principles of supply and demand, while slower availability and longer lead-in and delivery time-scales result in programme delays and missed completion dates. Both of these inevitably mean higher costs for a construction project. But how those costs are apportioned will depend on a number of factors, most notably the contract conditions, the point in the project time-line when the problem arose, and, most importantly, the attitude of the parties to resolving issues.

The main difficulty comes about where a contractor has to pay more for materials and labour than they anticipated when the contract was entered into. If they cannot find a way of offsetting those extra costs, they might suffer the same fate as some energy suppliers, who agreed to supply energy to customers at a price lower than they could buy it, and ended up making huge losses, ultimately leading to insolvency.

Possible solutions

Employers have become used to cost certainty and, with relatively low inflation rates, it has become commonplace in the UK to demand fixed-price contracts with quite long durations, and for contractors to agree to them, on the basis that the risks are easily managed. Unfortunately, for some, those risks have changed in a way which was not anticipated, so we need collectively to find a way out of the problem.

The range of alternatives probably divides into two main categories; those which involve contractual answers, and those which take a more practical approach, with the parties possibly agreeing to a course of action which results in a variation to the contract terms and conditions.

The important first step, however, is to get into meaningful dialogue and communicate early.

The contract conditions will typically set out which party bears the risk for time and cost; ordinarily, the contractor is obliged to complete the work by a particular date (or within a particular time-scale), using the materials and standards specified, and all for an agreed contract sum (which may be a fixed price, or a methodology for calculating it, such as a priced schedule of rates). However, there are also a number of contractual mechanisms which can result in changes to time and cost.

The emergence of the pandemic led to many people reaching for their contracts to see how they dealt with delays, and discovering that, for the most part, it depended on the cause. So projects which were delayed by government instruction such as a lockdown might be treated differently from those which were held up by labour shortages caused by mass illness. It also had lawyers reaching for their legal dictionaries to find a definition of terms such as “force majeure” and “so far as is reasonably practicable”.

There is probably going to be a different approach for projects which are currently “on site” and those which are planned, although the principles are broadly the same. In addition, the precise methodology for dealing with these issues will be determined by the contract itself and the processes laid down in its terms, (which in turn may depend on the procurement route chosen), as well as the type of work being undertaken.

Perhaps the most obvious solution is to change the materials being used for construction to something which is more readily available. Of course this should avoid compromises to the original design intent where possible, but sometimes it is necessary to lower the specification requirements.

The result would usually be an instruction issued under the contract, changing the kind, quality or scope of the work.

An alternative might be to vary the time-scales for completion of parts of the work — or all of it — to better suit delivery times of materials. In some cases, it may be appropriate to delay the whole project. During lockdown caused by Covid-19, many clients avoided problems caused by unavailability of resources simply by mothballing their projects — there was no point in enforcing the original completion dates because the finished building couldn’t be occupied anyway, so it actually saved them having to pay for work to complete it until it was needed.

There are a number of other ways of varying contracts; as well as the examples outlined, most provide for revisions to the completion date caused by things which are beyond the control of the parties. Some of these are more explicitly worded than others when it comes to unavailability of labour and materials, or increased costs, which makes life easier for all concerned.

Unfortunately, there has been a practice in recent times for clients to restrict the number of acceptable reasons for extension or the types of price increases which will be entertained.

The remainder of the solutions, therefore, tend to rely on the goodwill, or sometimes the negotiating skills, of the parties concerned. While contractors would like to see the inclusion of “fluctuations’” clauses, which allow the cost of inflation to be recouped for a range of work categories, this is not popular with clients, as it increases financial uncertainty.

Perhaps a compromise is to include some general price adjustment formula, which would provide a more collaborative and equitable result

Another method which is increasingly used is for the employer to pre-order materials, or ask the contractor to do it on their behalf, so at least the cost is known and materials are secured. Of course, the contractor has the option of doing this anyway, but in many cases this has not been left until nearer the time they are required on site, to ease cashflow, and this has rebounded in an unfortunate way.

Finally, there are a few options which are non-contractual, but could resolve issues as they arise. Employers may agree to meet some or all of the additional cost, or defer or extend work by waiving their contractual rights to damages for non completion. This is the most collaborative way, and embraces the spirit of co-operation and partnering ethos, but it is also the most controversial.

Conclusion

We do not know how long the current materials shortage will last, but most observers think that it is unlikely to be resolved in the short term.

This will inevitably have a detrimental effect on the Government’s aims, contained in its construction strategy, to reduce costs by 30% and programmes by 50% by 2025. It is difficult to see how tender prices and contract periods can reduce when costs and delivery times are going up. It should also be said that without reliable data to identify the root causes of cost increases and labour shortages, it is less easy to design a solution.

But employers should remember, if their contractors and suppliers become insolvent and cease to trade, someone else will still need to be engaged to complete the work, and the longer term cost will still be greater, with the added expense of sorting out the insolvency too. And the future pool of contractors will be smaller still, resulting in less competition.

So, most importantly, it is the time to communicate and engage with the supply chain, because it is only by formulating a joint strategy and action plan that problems can be managed and the worst case scenarios can be avoided.