Delivering new schemes in the face of a changing market

A perfect storm has been created in the construction industry, leading many of us to question the feasibility of progressing certain projects in the current climate.

The majority of schemes are being hit with:

• Increases in material costs with timber, insulation and steel going up by up to 40%
• Material costs which have reached a 40-year high according to BICS
• Rising cost of running site machinery
• Increasing labour costs, compounded by labour shortages
• Inability for contractors to fix costs for certain works packages
• Improvements in sustainability such as the move away from red diesel and changes to Building Regulations driving additional cost pressures
• Rising inflation

The result – we are working on schemes where the cost and risk profile are significantly different to what we were seeing even 12 months ago. Our clients are paying more to develop and as a result viability is being pushed to breaking point in some cases.

So what are we doing to help our clients continue to deliver?

Whilst we are all hopeful that we will start to see some levelling out of inflation and material costs later in the financial year there is little doubt that the industry will return to pre-pandemic rates and as a result we are going to have to find new ways of working to continue to develop.

We are therefore working closely with clients to mitigate the changing risk profile whilst still protecting their interests, including:

• Agreeing contractual mechanisms for upfront payments for materials in particular steel and other high value items to ensure orders are placed early and fixed before additional price rises
• Taking a more flexible approach to specifications, agreeing with contractors that alternative materials and components can be used where the same performance and quality are offered that do not impact on the budget or programme
• Negotiating risks sharing mechanisms whereby inflation risks are shared with a pain/gain clause included, splitting risk and costs equally between both parties

Underpinning all of our negotiations is open and honest conversation with contractors and clients, working in partnership to come up with a workable solution that allows schemes to progress without exposing either party to undue risk.

Whilst this wouldn’t work for every scheme, challenging times often require us to think about doing things differently. We have used this approach recently when working with Calico and RingStones to get to a position where we can enter into contracts to deliver a fantastic 93-unit extra care scheme in Burnley. This development will be the first of its kind in this area and will offer a sustainable, independent living offer for older people in Burnley.

For more information contact simon.lomiiko@identityconsult.co.uk