Inflation has hit the headlines this week with figures not seen since the early 1990s reported by the Bank of England. Against this backdrop Iain McIlwee, CEO at the Finishes and Interiors Sector (FIS) reveals new data from the FIS that raises concerns over the squeeze on the supply chain, particularly subcontractors and asks the question: are our contracts and procurement processes and the reliance on fixed price equipped to handle inflation at this pace and scale?
The latest UK Market View report published by Mace Consulting in January is anticipating tender-prices to be 4.5 per cent higher this year. Whilst a significant jump on previous forecasts, FIS is questioning whether this is enough.
Within the Finishes and Interiors Sector, Material price inflation averaged around 20% in 2021, even higher in some cases such as timber and steel. Whilst there is evidence that prices may have started to stabilise, warnings from Arcadis, CLC and reports from FIS members highlight the next inflationary pressure is the escalating energy costs. Businesses are not protected in the same way as consumers and the pinch is starting to be felt.
But this is only part of the pressure on sub-contractors. The FIS Wage Rate Survey H2 2021 conducted in December revealed that, across the trades, FIS members have experienced significant wage rate increases particularly in key trade occupations, such as second fix carpenters and dryliners.
Commenting on the survey, FIS CEO Iain McIlwee stated: “It is good to see headline contract values are increasing, but to my mind the maths doesn’t work and they are not moving in line with costs. For most sub-contractors, the core costs of labour and materials will typically represent, according to our latest research, around 80% of business costs. Fuel bills, energy bills are all mounting too; 4.5% doesn’t cut it when the base costs are far exceeding this.
Added to this we are seeing projects subjected to severe delays, programmes out of sync due to the upheavals and in a fixed price environment, this is a real concern and adds further cost and risk.”
Continuing, he said: “I suspect these pressures are felt most acutely in the finishes and interiors sector, as we are late in the programme. We have to look, as a supply chain, more carefully at how we are pricing work and risk. We must also use contracts better (including fluctuation clauses) and ultimately recognise that sub-contractors are often being asked to hold more than their fair share of price, time and design risk.
Negative behaviours are adding to the cost pressures and we are seeng insurance increasingly difficult to secure and premiums continuing to rise, in some cases by eye-watering amounts – this before we factor in some of the changes to legislaton such as the Defective Premises Act now proposed. With legacy concerns and adversarial negotiations and disputes still sadly commonplace, we know of a few companies that have decided that it is not worth carrying on or have sadly entered administration this year. More will follow and corners will be cut unless we start to shift the dial, price the risks, generate sufficient time and capital to invest in people and technology and use the conflict avoidance process to work more collaboratively as a supply chain.”
For further information or for any questions, please contact FIS at firstname.lastname@example.org or call 0121 707 0077.