Accounting for the crisis unfolding in construction

On the surface, construction is booming with residential properties projects dotting the urban landscape. But there is also a growing crisis as the sector is squeezed by global supply chain issues, skills shortages, and skyrocketing prices.

From an outsider’s perspective, at least, things are looking rosy right now. You only need to walk through the average city centre or down a residential street – clocking the cranes, diggers, dusty building sites and scaffolding outside suburban homes as you go – to realise this is one sector that has defied pandemic hardships.

As ever, the numbers tell a different story: there simply aren’t enough people or resources to keep up with the insatiable demand for new homes and maintenance works. The construction sector is suffering from severe supply chain bottlenecks, resulting in higher prices for components (the price for timber, for example, has soared by 200%, according to some estimates). There’s a skills shortage too: vacancies are at their highest for 20 years but struggling to be filled, partly thanks to an exodus of foreign workers during Brexit. With construction constituting around 6% of the British economy, the sector is seen as key to the UK’s post-Covid revival. There are worries the shortages in construction could slow this recovery.

These pressures can also create havoc on a spreadsheet, meaning that for those accountants working in construction, forecasting and financial planning is more challenging than it was six months ago. Here’s what they have to say…

Source: Office for National Statistics - Construction Output and Employment
Source: Office for National Statistics – Construction Output and Employment

What’s behind Britain’s building boom?

The last two year’s have been a roller coaster for construction, from last April’s record 40% fall in output, to a bounceback that has also seen the strongest growth on record.

This robust recovery is partly due to building sites being one of the few workplaces allowed to remain open during the lockdowns of 2020-21, as well as the Government’s emergency cut in stamp duty in England and Northern Ireland, which has prompted a boom in house prices. According to government data, the average price of a UK home soared by 8.9% over the year to April 2021.

With people spending more time cooped up inside their homes over the last 18 months, they’ve also reassessed these living spaces (which are now also workplaces too).

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Growth sectors

The lockdown home improvement project has become a phenomenon the world over, creating masses of work (along with global competition for resources). With offices and workplaces closed, families are moving to the countryside for more space, while consumers are throwing themselves into the DIY craze or taking up hobbies like woodworking (Kingfisher, the owners of B&Q, have attracted 10m new online consumers during the pandemic). Zaira Rice FMAAT, a Derbyshire-based Finance Manager working in the construction industry, notes that, “owing to the national lockdowns, many households have experienced a surplus in disposable income, with homeowners opting to spend more on home improvements, such as extensions.”

For the housebuilding goliaths, it’s been a good time, as demonstrated by the impressive figures they’ve posted. This summer, Taylor Wimpey and Barratt Developments announced they expect to reach annual profits of £820m and £800m respectively, a feat set to be repeated by Persimmon, which has already reported pre-tax profits of £480m for the first six months of 2021 (a staggering rise of 64% from the same period last year).

However, Giuseppe Colombi FMAAT, founder and co-owner of Bromley-based construction specialists Best Choice Accountancy, says it’s a different story for smaller firms: “Many one-man-band companies have suffered or gone out of business, particularly those who aren’t very orderly with their taxes or get paid in cash.”

It’s not just the domestic scene that is doing well . Retail and industrial construction are rebounding strongly after a poor year in 2020. Surprisingly, perhaps, office construction is also recovering, buoyed by refurbishment and adaption of workspaces for collaborative and hybrid working.

Materials and products shortages

Now the bad news…

Supply chain shortages are hampering the construction industry’s record growth. According to the monthly survey by IHS Markit/Cips in July, 77% of firms in the sector reported longer lead times from suppliers. Cement, copper, steel, roof tiles, timber, paint, even kitchen sinks, are all currently scarce. Ordinary consumers are also being affected, with many unable to find the materials for their new ‘shoffices’ (shed-offices) on the empty shelves of their local DIY stores.

The dwindling supplies are being created by a perfect storm of issues, such as Brexit (many smaller EU exporters have quit exporting to the UK due to new trade restrictions), an increase in shipping costs due to Covid (the cost of a container load from China has risen from $2,100 to nearly $16,000 within one year) and delays to global supplies caused by the blockage of the Suez canal by the Ever Given in March.

The delays are significant: for example, cold-rolled steel joints used to take six weeks to arrive; now, they take nearly five months.

As a result, the prices of those materials still available have risen sharply. “One of our clients does loft conversions and has noticed an increase of almost 200% in the cost of timber over the last six months,” says Alex Shirlaw MAAT, senior accountant and manager at Best Choice Accountancy. “Having already provided his customers with a fixed quote, he now finds himself in the difficult position of either absorbing the inflated cost of what he has used, or increasing his fee to the customer during the middle of a project, which isn’t ideal.”

In June, prices soared by 14.7% for all construction work, compared to this time last year, according to the Department for Business, Energy and Industrial Strategy (BEIS); paint companies hiked their prices by 4-5% in the same month according to a dealers’ channel check by ICICI Securities Ltd.

“The impact has been shattering,” says Rice. “One of my tasks is producing gross margin workings for the board of directors. When doing this, I regularly notice the cost of transport and materials such as ready-mix concrete and steel have increased considerably since the start of 2021.”

It’s making forecasting and budgeting difficult for many accountants working in construction. Communication to everybody within the supply chain is essential. “It’s never been more important to build strong working relationships with suppliers,” says Rice.

Also, when clients working in construction are under financial pressure, it can result in these companies failing to pay their accountancy fees. “Because they are unable to find the resources to build with, there is a shortage of cash, affecting the ability for companies to pay,” says Colombi.

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The skill shortages

The construction industry isn’t just suffering from a paucity of materials: there aren’t enough builders to go around either. In August, there were 35,000 jobs available in the sector, the highest in 20 years, according to the Office for National Statistics (ONS). Shirlaw notes a “strong demand for welders and tilers” from her clients.

Yet, the number of construction workers from the EU in the UK has fallen by 42% since 2017 (from 208,067 to 120,723) according to a report in the Guardian. The ‘pingdemic’ hasn’t helped matters either.

The staff shortages could put the handbrakes on the UK’s economic recovery from Covid. The Government has a target of building 300,000 new homes a year by the mid 2020s, but the industry will need to recruit an extra 217,000 workers to meet rising demand according to a forecast from the Construction Skills Network (CSN). The regeneration of the north of England could be affected, especially if construction workers heading south to London for higher wages.

“As accountants, we’re not seeing much of an impact,” says Shirlaw. “But as the months have gone by, many companies within the construction industry are ceasing to trade.”

Cladding and Grenfell 

Four years after the Grenfell disaster, where 72 people lost their lives when the tower’s combustible cladding caught fire, there is still no reliable assessment of how many buildings in the UK could also potentially go up in flames.

It’s resulted in higher fire safety bills and soaring insurance costs for the building industry. If a high-rise project has problems with its cladding, it could cost construction firms £50m to correct it.

Want to work in construction? Here’s what you need to know

Working as an accountant in construction is a rewarding job. It’s a profession where you can see the impact of your work (in the buildings created), plus there’s camaraderie too. As Colombi notes, “clients regularly view you as being a member of the team.”

But it does require a specialised skillset than other industries.

“There are many risks in the industry: jobs can go badly, plus margins are tight,” says Colombi. “Because many companies don’t understand the meaning of profit and loss, [accountants need to] teach their construction clients to ensure they’ve got the financial resources to meet these challenges, and pay their taxes.”

He also notes that companies sometimes struggle with the Construction Industry Scheme (CIS), whereby contractors deduct money from a subcontractor’s payments before passing it onto HMRC. “If this isn’t applied consistently and correctly, it can incur penalties [of up to £3,000 for late payments],” says Colombi. “Many companies feel that large amounts of CIS have been deducted at source which have never been claimed.”

“Accounting is fundamental to any business,” adds Rice. “But it’s a specialised skill within construction, especially given its volatility and unpredictability. Precise cost analysis and cash flow management is crucial. Also, accountants need to be more commercially aware than ever before given the market can fluctuate rapidly.”

The construction industry is waiting to see how the anticipated rise in unemployment hits projects at the end of this year. Forecasters believe it could halt the recovery.

“Because of Covid grants and furloughing still being in effect, we’re yet to see the full extent of the pandemic’s damage,” says Rice.

“The true picture will come out once the dust has settled.”

Christian Koch is an award-winning journalist/editor who has written for the Evening Standard, Sunday Times, Guardian, Telegraph, The Independent, Q, The Face and Metro. He's also written about business for Accounting Technician, 20 and Director, where he is contributing editor.

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