AS Allan Callaghan, Managing Director of Cruden Building, notes, the problems in the global supply chain that are affecting a wide range of industry sectors are hitting construction as well. At the same time, securing sub-contractor resources has also become more difficult.
“The construction industry as a whole was one of the first industries to really get to grips with the risks posed by Covid-19. The unions too, were very responsive, but none of this could do much to counteract the sub-contractor and supply chain issues that were a consequence of Covid-19,” Callaghan says.
While the headline rate of inflation today is around 5.5%, he points out that the combination of Brexit issues and supply chain issues means that the construction industry is actually grappling with inflation that is nearer to 10% and over, with some elements as high as 50% higher due to a combination of raw material increases, fuel and transportation etc.
“There are some signs that this is starting to calm down. There is clearly some element of opportunism there from suppliers who are looking to recover losses they may have made over the Covid-19 lockdown and slowdown.
“However, we also have to take into account the increases that we are experiencing as we and the industry look to raise technical and performance standards, lower our carbon footprint and increase the sustainability of the homes we build,” he comments.
There is a cost associated with developing new, greener materials and procedures. The challenge for Callaghan and his colleagues, and for the sector as a whole, is finding ways of keeping the cost of affordable housing within reasonable bounds while meeting and exceeding new building regulations.
“The goal is to treat all these material and procedural improvements as background and as an agenda for a positive engagement with our clients’ requirements,” he notes.
Of course, if housebuilders are hit with a surprise surge in inflationary prices while a project is in mid-build, they are going to be severely disadvantaged. They will already have agreed prices with the client and will have nowhere to go. However, Callaghan points out that some clients are being realistic and have a grasp of the difficulties facing new projects.
“Today, when we sit down with clients at the start of new projects, they engage positively with us. The big picture is that Scotland is leading the world on what we are trying to achieve with our net-zero targets. We have a huge issue in this country with fuel poverty, so clearly we have to improve the ability of new homes to retain heat and reduce energy demands. We also want, wherever possible to satisfy energy and home heating requirements from low carbon solutions,” he says.
Cruden is currently working on a number of projects tackling this, for example, that are designed to achieve net-zero carbon or achieve Passivhaus accreditation “Building to higher environmental standards and doing this on tight funding is challenging. We are very active and innovative but there are cost and funding implications,” he notes.
One of the difficulties that have to be overcome is the mismatch between how low carbon and sustainable building methods impact the funder, versus tenants. “Tenants benefit directly year in and year out when you build in a way that lowers their fuel bills.
However, the funder, be it a council or a housing association, has to bear a higher capital cost and does not get to share the revenue benefit that the tenant enjoys.
“There is a dislocation between the capital costs of low carbon heating and better home insulation, and the revenue benefits. The question for the developing landlords, the house building industry and the government is to find answers to how to recognise and deal with this dislocation,” he comments.
However, he adds that the response from local authorities and housing associations has been very positive to date. “They are looking to the future and they can see that investing now in their housing stock will give them a better position in a few years,” Callaghan says.
One silver lining in all this is that as the increased building specifications become the new norm and building to a lower carbon footprint becomes standard, costs may well fall.
However, housebuilders like Cruden have to deal with the fact that they need to invest now in the parts of their business that are going to enable them to deliver to the new standards.
“In a sense, there is nothing new in this. The bar is always moving, in construction, and now it is moving again to a new level of innovation, and we all have to respond accordingly,” he comments.
The obvious analogy, he points out, is with automobiles. Cars keep getting new features and innovations added to them, frequently with the aim of making driving safer. Initially, these are expensive add on elements or are only on the more expensive models. However, over time, they become standard
“If you go back ten years, solar panels, for example, were much bigger and more expensive than they are today and were also a lot less efficient. Today, they are smaller, more efficient and a lot cheaper. So sustainability does not necessarily mean that costs keep spiralling onward. However, as we stand now, sustainable heating, off-site fabrication of panels and efficient insulation all have cost challenges associated with them,” he notes.
With all these improvements, there is a cost and a value side of the equation and both parts need work, Callaghan notes.
“Sustainability is the key in all of this. We are pushing beyond the current building standards and looking at things such as heat pumps, which are outside the current technical building standards. We are also looking at factors such as vehicle charging on-site, as the government looks to push the use of electric vehicles,” he says.
Both the UK and the Scottish governments are looking to move beyond gas as the source for home heating and hot water. Hydrogen is on the horizon as a possible fuel of choice.
“We are constantly having to think ahead. One of the big challenges today is what will happen post-2025 when gas is phased out as a heating fuel? Battery technology is one of the answers we are looking at, but hydrogen is definitely there in the mix.
“House building is more dynamic today than it has ever been and we have to be able to respond,” he comments.
This article is brought to you in association with Cruden Building.