Build cost uncertainty is certain – time to plan for the worst

News article published by React News on 20 January 2023

GUEST WRITER: James Porter, partner in building consultancy at Rapleys

According to official figures from the Insolvency Service just before Christmas, building firms are going bust at the fastest rate since the financial crisis. The construction sector, which makes up 7% of the economy, is reportedly driving overall insolvencies to a 13-year high.

With a perfect storm of rising material costs and labour, with a skills gap emerging, and high land values challenging viability, it’s hardly surprising that sites are shutting down across the country and smaller builders and construction firms sadly close their doors

Last week, Nottingham-based contractor DAKO Construction fell into administration citing factors including an untenable cost situation, Covid and Brexit. And it’s not the smaller players affected with Crest Nicholson pausing their regional expansion and Taylor Wimpey reporting a cost cutting programme.

We have high interest rates, high inflation, increasingly difficult mortgage criteria and restrictive lenders. Companies starting to consult with staff will have a further negative impact in 2023 to both the employment market, the housing market and consumer confidence in general.

Since the disastrous mini-budget under Liz Truss, there has been a significant slow down in housing delivery and more developments being mothballed in direct response to a decline in demand due to higher interest rates.

The only thing that is certain is that we are uncertain about everything when it comes to what else is coming down the tracks for construction over the next few years.

The cost strategies and plans completed for clients last month and even last week will be out of date already thanks to subsequent interest rate rises, which has an impact on budgets, affordability and then viability. Aecom said this week that costs rose by 10.7% in the last quarter alone, and we have every reason to expect more damning figures in April.

It’s therefore crucial right now that as much flexibility is built into development budgets as possible. Contingency budget and buffering has never been more important.

Equally developers and constructions firms need to be absolutely certain about where exactly in the process of budgeting and costs vs returns that a scheme will become unviable and how much room for manoeuvre before that breaking point there is and have and exit strategy or plan B scenario well in advance.

All over the country there are half completed sites that could lie vacant and unfinished for years if other developers deem them unviable ventures.

It’s possible that some of these could have been prevented with expert help early on and by ensuring that a flexible budget, contingency and upfront scenario planning to assess the breaking point was done at the beginning of the project.

Live cost consultancy and budget data is literally the minimum any company or individual should have on their radar when embarking on a housing project. But there is so much more that can protect against failing to see the worse before it happens.

We need to share that knowledge before even more business insolvencies and unfinished sites hamper the country’s best efforts to deliver much needed housing.