News & views

Wednesday, March 08, 2017

Despite positive economic data, the weak pound could pose challenges for UK tradespeople this year. In particular, rising material costs might prove an issue ...

The UK economy has so far defied fears of a post-Brexit slowdown, with the Bank of England even raising its growth forecast for 2017 [SC1]

Despite concerns about the potential impact of the EU referendum on Gross Domestic Product (GDP), the economy grew by 2% last year [SC2], giving the construction, manufacturing and services industries cause to be optimistic.

But while consumer confidence seems to have held up since the June 23 Brexit vote, it’s not all been plain sailing, with Sterling slumping in value. The weakened pound could pose particular challenges for builders and tradespeople, forcing them to contend with higher material costs…

Pound tumbles against major currencies

In the short term at least, official GDP figures suggest the ‘leave’ vote has done little to damage the UK’s growth [SC3]. Yet things are less clear-cut when it comes to the fate of the pound.

After surging on the eve of the referendum, when opinion polls suggested a ‘remain’ victory was on the cards [SC4], Sterling has since tumbled – at times dipping below 1.20 US dollars [SC5]. The pound has also dropped markedly against the euro [SC6].

For some companies, this trend may prove positive. Research from the CBI suggests manufacturing exports have become more competitive on the back of Sterling’s depreciation [SC7].

But the weak pound appears to be a double-edged sword, with other studies warning about its impact on business costs.

Sterling’s decline pushes up material costs

For tradespeople focusing on domestic rather than international markets, the continued weakness of Sterling may prove one of 2017’s key threats.

Research from IHS Markit and the Chartered Institute of Procurement and Supply shows construction firms faced their largest rise in costs since 2008 during January [SC8].

And other recent data from the Federation of Master Builders (FMB) suggests 70% of the country’s smaller building firms have now seen material prices rise because of the falling pound. A wide range of trades have been affected, with prices increasing on everything from timber through to Spanish slate [SC9].

Highlighting the scale of the problem, FMB director of external affairs Sarah McMonagle said: A quarter of all materials used by the UK construction industry are imported. This is significant and underlines the vulnerability of the industry to sudden fluctuations in the strength of our currency.”

Understanding the impact of rising costs

Higher material costs could eat into the profit margins of construction firms – something which may be particularly difficult for tradespeople running small businesses.

And there might be wider implications too, including:

Problems pricing jobs accurately. Since material costs have the potential to go up halfway through a job, accurately charging clients is becoming a trickier process. To cover themselves against sudden increases, tradespeople might be forced to set aside larger contingency funds.

Higher costs for clients. Construction firms may need to set higher charges for their household customers and business clients, in response to fluctuating material expenses.

Less choice for customers. If certain materials become overly expensive, building firms and their customers might have to adapt accordingly and rethink the designs of their projects.

Protecting your business interests

At a time when Sterling remains weak, it could prove difficult to escape material price hikes. But that doesn’t mean you should simply sit back and wait for them to hit your business.

Instead, reviewing your budget, cutting unnecessary spending, and seeking the best deals on things like energy and transport could all help to mitigate higher material expenses.

The desire to find the best deal for your business should extend to your search for an insurance policy. Affordability is one factor to consider; however, and perhaps more importantly, you must consider whether a policy offers adequate cover for your businesses assets.

Underinsurance of increasingly expensive business critical materials could cause unsustainable economic losses in the event of a claim.

As such it has never been more important for business owners to take a proactive approach when it comes to reviewing their sums insured; thereby making sure their cover is adequate.

Having an insurance policy in place which offers the correct level of cover for your business is a simple way to avoid further, and sometimes critical, business expense.

NIG offers a range of products to suit the insurance requirements of a wide variety of businesses.

From our Tradesman eProduct, designed for businesses with a turnover of up to £1,000,000, through to our regionally-traded Contractors Combined Product, designed for businesses with a turnover of up to £10,000,000 (larger quality risks always considered); we have the capability to provide adequate cover for your business.

Learn more about our Tradesman product

Learn more about our Contractors Combined product