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Construction Supply Chain Woes Could Lead to Beneficial Outcomes

Network News

The shortage of materials in the UK construction industry is highlighting the importance of supply chain resilience and the need for robust risk management regarding trading partners.

Supply chains serving UK construction have been hit by Brexit, both in terms of delayed shipments and the impacts caused by moving away from CE (European Conformity) product marks and to UKCA (UK Conformity Assessed) marks, when there are just 45 UK testing houses able to provide the latter, as opposed to 700 testing houses in Europe.[1] Additionally, a national shortage of HGV drivers means products cannot be moved as quickly as the industry requires in order to keep projects on schedule.

HS2,because of its sheer size as a project, is also causing a spike in materials demand, whilst global shipping has been impacted by a shortage of sailors, due to the slower Covid vaccination programmes in key countries for marine labour supply – such as the Philippines, India and Indonesia.[2]

Raw material costs are soaring. Imported plywood was 29.8% more expensive in May 2021 than in May 2020. Other materials, such as timber and fabricated steel are rising significantly in price. Overall, material costs were 10.2% higher in May 2021 than 12 months earlier.[3]

The Federation of Master Builders (FMB) warns that it is the smallest construction firms that are suffering most and 90% of construction firms fall into this bracket. The sector is said to be experiencing its lowest levels of optimism since January.[4]

Marine cargo insurance is unlikely to cover any losses incurred due to delays in shipping, with this type of insurance usually requiring physical loss or damage to the product in order to trigger a delay clause within the policy wording. What construction companies should be doing is examining the benefits of trade credit insurance.

This type of insurance played a major role in supporting supply chain resilience at the start of the pandemic but is too often only associated with exporting. It protects a firm against non-payment risks, covering its ‘receivables’. Monies owed for the supply of goods and services – are typically 20-80% of a company’s assets and non-payment, due to a customer delaying payment or becoming insolvent, can have a devastating effect on a business, particularly if it is reliant on short-term cashflow. A trade credit insurance policy could pay invoices, if a customer cannot.

Whilst this policy benefit offers peace of mind to businesses, there is another benefit too. The insurer could work with the business, to identify which customers within their supply chain present the greatest risks, thus mitigating the overall risk to the business through the implementation of particular terms for those customers, such as reduced credit terms or set credit limits, and helping to build a more resilient supply chain. At this point in the construction industry’s history, this could be of major benefit to many businesses and to the industry’s stability. Furthermore, having trade credit insurance in place can make access to finance easier and help secure better terms.

Better risk management, through trade credit insurance, could be one benefit of the current supply chain woes. Another could be that material wastage has to be minimised – beneficial to the environment, but also potentially to other construction site risks. Training and refresher training may well be required, to implement more stringent quality controls and minimal wastage of precious materials. This culture itself, the start of an ESG (Economic, Social and Governance) strategies at grass roots level should help to reduce risks and promote safer working, key factors when it comes to influencing insurance premiums.

If you need help with your risk management and wish to know more about how trade credit insurance could strengthen your supply chain and your construction business’s trading position, please get in touch. We will then introduce you to a broker specialising in your sector, who can help provide you with the support and cover you require.

Sources:

[1] https://www.pbctoday.co.uk/news/planning-construction-news/construction-materials-shortage/97085/
[2] https://www.insurancejournal.com/news/international/2021/07/28/624580.htm
[3] https://www.constructionnews.co.uk/supply-chain/materials-shortage-timber-and-steel-prices-continue-to-rise-in-june-07-07-2021/
[4]https://www.developmentfinancetoday.co.uk/article-desc-8638_Materials%20shortage%20‘disproportionately%20affecting%20small%20builders’,%20claims%20FMB

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