Ryan Gilluley: In a wartime economy we should be building bridges with colleagues in Ukraine
Ryan Gilluley, managing director of Lanarkshire-based GCM Ltd, considers the war in Ukraine from the perspective of the Scottish construction sector.
No sooner had the effects of the pandemic on the construction industry started to ease than another global crisis threatens to push up costs.
The Russian invasion of Ukraine is unlikely to have a direct impact on the price of commodities and services for developers and contractors in Scotland, but the knock-on effects from other countries in Europe – particularly those that rely on Russia for fuel supplies – will inevitably add to cost inflation.
While the conflict is likely to lead to some supply chain issues, by far the biggest effects will be felt from higher-than-expected oil and gas prices.
The impact of the war will add to existing problems for an industry already suffering from delays and shortages in supplies and a lack of skilled workers, both caused by a combination of Covid and Brexit.
While the shortage of building supplies is now starting to ease, there continues to be delays in the arrival of some materials, among them roof tiles, with reported lead times of up to 10 months, as well as cement and steel.
The Construction Leadership Council (CLC) said recently that it will take the UK another 12 months to properly address a lack of available bricks.
While some of the initial administrative hurdles associated with Brexit are easing, queues at shipping ports continue to cause hold ups.
Added to those headaches, are growing environmental and regulatory requirements on construction industry members.
While developers and contractors are not reliant on Russian oil and gas, many of the materials used by the Scottish construction industry contain petro-carbons or their production is energy-intensive, pushing up prices.
Further inflationary pressures from there will add to a continued trend of growing material prices since the start of the pandemic.
Should the Bank of England’s Monetary Policy Committee decide to raise interest rates sooner and higher than anticipated, this could lead to the emergence of stagflation – inflation combined with slow or negative economic growth – not seen in this country since the 1970s.
While uncertainty abounds surrounding Russia’s intentions in Ukraine, an escalation in the war that necessitated European countries refusing to take Russian oil would be a worse case economic scenario.
Contractors and their supply chain partners in Scotland should already be considering their options, particularly if higher prices need to be passed on by a sector that can barely absorb any more rises.
Main contractors operating on already tight profit margins may not feel that they can shoulder any more of the burden and could be forced to pass on cost increases further down the line.
The widespread use of fixed-price contracts – some set to continue well into this year and even beyond – may necessitate some difficult conversations with sub-contractors.
During such times investors and developers may start to look for opportunities to cut fat, including renegotiating contracts or even cancelling projects altogether. The one sector that may escape the axe is likely to be defence procurement.
Despite such depressing portents, there continues to be a general air of calm and pragmatism, with many people recognising that with colleagues in Ukraine facing life or death decisions, there is a need to reassess and reprioritise.
Build UK summed up the mood when it called on contractors to look out for individuals affected by the war.
Chief executive Suzannah Nichol said: “The industry should be looking to provide support for any Ukrainians in the workforce, many of which will have family in Ukraine and are likely to be extremely worried for them.
“We are suggesting to our members that they check in with any Ukrainians they employ or have on their sites, make sure they are OK and offer support where they can. This may be reassurance and moral support, or more practical advice such as access to Skype or phone facilities or support with extending work visas.”
Melanie Leech, chief executive of the British Property Federation, said she was “extremely concerned,” adding: “I expect that businesses will be reviewing their own investment and decision-making frameworks to see whether they feel any action is justified in line with their approach to good governance.”