Over the last year the construction press has been full of reports of spiralling material price increases and material shortages. Those trying to deliver construction projects have had these problems compounded with labour shortages as well as the rise in fuel costs.

Initially the shortage of materials appeared to be due to the upsurge in the activity in the construction sector which followed a global drive to stimulate economic recovery from the COVID-19 pandemic. The demand was greater than the supply and this was complicated in the UK due to Brexit and the additional procedures for importing materials into the UK. This year the war in Ukraine has also had an impact as Russia had been a major supplier of nickel (often used in stainless steel) and steelworks in Mariupol were a major exporter of steel. The CLC report in April 2022 reported that in the foregoing 3 months there had been price inflation of 10-15% on materials such as steel, cement and glass (and that was on top of price increases in 2021). In April 2022 the UK BEIS reported material price increases for "All Work" of 24.5% from the year before.

As we move into the second half of 2022 can we expect to see an improvement in the situation and what does this mean for projects in Scotland, especially the Highlands and Islands?

The bad news is that prices of materials are not set to decrease – for that to happen supply would need to be higher than demand and that does not seem likely. However, in some areas there does appear to have been a bit of settling down and from a contractual perspective parties have now had time to work on solutions and "test drive" a few of these.

For example we have included a variety of contractual measures as a means to mitigate the uncertainty of price increases/material shortages. These have ranged from simple advance purchase of materials (perhaps supported by an advance payment bond or offsite materials agreement (the latter so that the client obtains title to the materials on payment)) to more complex drafting in relation to fluctuation of costs of materials (often limited to certain materials, requiring evidence of price increases and potentially with caps on the price increases to limit the risk from a client's perspective) and use of provisional sums for particular items (with open book tendering for full transparency on costs).

Issues with labour do not look likely to improve in the short term either – the industry is still feeling the impact of EU workers returning home. According to the ONS there are now 244,000 fewer workers in the construction sector than 3 years ago. In Scotland the RICS reported that around 50% of respondents reported labour shortages – this could be a particular issue in parts of the UK like the Highlands and Islands that are a bit more remote. Large infrastructure projects such as HS2 and Hinckley Point are also using a large number of workers decreasing the workforce available for work elsewhere. There is also still a shortage in HGV drivers, albeit this has vastly improved from the position 6 months ago. The Federation of Master Builders reported that nearly 40% of members were struggling to hire bricklayers.

It therefore has been suggested that these labour shortages, material supply difficulties and cost increases when coupled with available budgets could mean a reduction in projects coming to market.

The good news however is that, at the moment, construction market activity is reported by RICS to be continuing to rise. This growth appears to be mainly driven by infrastructure projects as well as public and private housing. In the Highlands and Islands, the pipeline of housing would support this - whilst it was reported that the Highland Council was unable, due to COVID related issues as well as labour and materials shortages, to deliver all of its budget in 2021 relating to housing, it is anticipated that 500 houses will be delivered in 2022-23. The Highland Council has also committed £31m to be spent on works to roads in 2022-23. And there have been 2 bids put in for round 2 of the UK Levelling Up Fund - for works on the North Coast 500 and at Portree Harbour. Tulloch Homes has recently announced that it is seeking planning permission for houses, a primary school and retail on the south side of Inverness and Cabot have recently acquired the Castle Stuart golf course and are looking to develop that to include a new course, cottages, retail and restaurant.

Therefore, whilst the issues with pricing and supply of materials will likely persist and be challenging there should continue to be growth in construction in the Highlands and Islands with a variety of interesting and important projects.