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  • Writer's pictureNíall Hedderman

Maximum Capacity

I started Capital A during the dark days of the great recession but one advantage was that a depressed economy made it easy to find a builder and negotiate a highly competitive price. Construction costs were predictable then but things have changed. Over the course of 2016 builders became incredibly busy and costs spiralled. I carried out a number of tenders in Edinburgh over the past year and each one was increasingly challenging for one reason: Capacity.

The best contractors are oversubscribed and by August 2016 most were fully booked until January 2017. Getting a contractor may be difficult but thats nothing compared to agreeing a reasonable construction cost. Prices are usually driven by material and labour but these have been relatively stable, the main driver today is opportunity cost. A contractor can only take on so many jobs and they have to see each job through or risk getting a bad name. If they take a job with a low profit margin they risk not being able to take on a more profitable job elsewhere. Every opportunity has its costs. One firm I regularly deal with declined the chance to tender for a £200k alteration and extension to a townhouse in Edinburgh. A well funded, prestigious project with planning and building warrant granted, ready to start as soon as possible but the firm said no. One week later the same firm agreed to negotiate the price for a modest one story extension in suburban Edinburgh. A much smaller job but it would be built quickly and for a higher price than similar jobs cost in previous years. 

Another tender in recent months was for an internal alteration to a suburban house, joining three rooms into one big living area, replacing the stairs and altering the upper floor layout. Experience told me this should cost £40k - £50k but the tenders came back at £90k+VAT. We are now redesigning the layout and reducing the scope of the project in order to keep the budget down. Costs for construction are going up, not because of labour and materials but because builders are worried about loosing more profitable work elsewhere. In simple terms the cost of hiring a builder is not connected to the value of the work, it is a bidding war between everyone who needs building work carried out. Hiring a builder is now more akin to buying a house in an expensive part of Edinburgh. The house may be valued at £400k everyone knows it cost far less to build that house than to buy it, but that isn’t relevant. What matters is that you have to out-bid all the other people who want it. The same now seems to be true of builders in Edinburgh.

Into all of this comes the Brexit result. It is too soon to tell how it will all play out but two themes are emerging. 

First, for most people it is business as usual and they want work carried out to their homes and business premises, creating demand for builders. 

Second, a significant number of eastern European contractors are having seconds thoughts and considering leaving the UK. The positive impact European immigrants have on the UK construction industry is hard to overstate, if we loose even a fraction of these workers during a period of rising demand, the results will be even higher prices and longer delays. 

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