31 May 2022

This Is How Material Inflation Will Impact the Defence Sector

Analysts expect the cost of raw materials in the UK to more than triple in 2022 following on from it reaching a 40-year high in 2021.

Inflation is affecting businesses across all sectors of the economy. Construction may be one of the first that comes to mind, but even the defence sector is feeling the impact. That said, your business can continue to grow despite the most of challenging times.

Learn more about the effects of material inflation on construction and defence. You will also see what you can do to help your business overcome these challenges.

Material inflation and labour shortages in the UK

A shortage of materials impacted the construction industry considerably throughout the course of 2021. Material costs increased every month from September 2020 to September 2021. A range of factors, including the COVID-19 pandemic and Brexit, are to blame.

Material production slowed or stopped due to lockdown restrictions during the first wave of the pandemic. However, demand increased as homeowners started improvement projects. Usurpingly, supply chains were unable to keep up.

New regulations, as a result of Brexit, have delayed shipments from overseas. Brexit rules have also reduced the number of available construction workers. Other labour shortages, like the lack of HGV drivers, created more challenges.

Material inflation affected products including:

  • Timber, which was one of the hardest hit
  • Bricks and blocks
  • Cement
  • Steel
  • Roofing products
  • Paints and coatings

Supply chains have started to return to normal for some commodities. Challenges remain, though, as global conditions continue to be unstable. The current war in Ukraine has added to the supply chain pressure.

Effects of material inflation in 2022

Inflation is surging at the fastest rate in 30 years. The government reported that material price inflation was more than 24% in March for certain commodities.

Sharp increases in energy prices due to the war in Ukraine are causing some material prices to rise. Energy-intensive industries like concrete, steel, and cement are passing on the higher cost.

Supply chain issues continue to affect materials including:

  • Timber
  • Bricks and blocks
  • Cement
  • Steel
  • Roof tiles
  • Paints and coatings
  • Electrical products, especially those using semi-conductors or microchips

A survey of construction companies in the first quarter of 2022 showed that the lack of materials was a challenge for 84% of respondents while almost 75% reported struggles when it comes to labour shortages as well.

Ministry of Defence and the construction industry

Specialist construction expertise is critical for national defence as high-quality infrastructure for defence projects supports the mission of the Armed Forces. Organisations overseeing infrastructure capabilities for defence include:

  • Ministry of Defence (MoD)
  • Defence Infrastructure Organisation (DIO)
  • Infrastructure and Projects Authority (IPA)

Infrastructure was the fourth largest category for defence spending in 2020-2021.

Specialist defence contractors

Defence construction contractors need skills beyond those for civilian projects as major infrastructure contracts are becoming larger and more complex. Military capability projects are the second largest category in the Government Major Projects Portfolio.

Major build and refurbishment projects take place in highly regulated and demanding environments. Special arrangements are necessary to maintain security. Construction operations must have as small an impact as possible on the activities at a site.

Contractors must also be flexible and agile as:

  • Defence projects may change at short notice
  • Operational plans may alter
  • The government may shift funding priorities.

Material inflation and defence

The construction and defence sectors have a close relationship. This means that the effects of material inflation are large for defence.

Profit margins in the construction sector are slender. Winning a defence contract means the contractor has demonstrated fiscal restraint. They have already eliminated unnecessary costs.

Material price rises during the project put the construction company under stress.

Some contracts are fixed price. The construction firm cannot charge more when the price of materials increases. Material inflation is outpacing the typical infrastructure profit margin. The company may face insolvency.

Contractors with the bespoke capabilities necessary for defence infrastructure may not be available. The loss of knowledge and capability is difficult and costly to re-establish.

Defence budget and inflation

Another consideration is the impact of inflation on the defence sector budget. The government had announced an increase of 3.3% in defence spending however, inflation has eroded that increase, with spending only rising by 2.9% in real terms. This eliminates a tenth of the expected growth.

Chancellor Rishi Sunak confirmed in the Spring Statement that the defence budget will not increase. Buyers will be evaluating tenders even more carefully than usual to ensure they are using their budgets effectively.

Continuing to succeed with defence infrastructure contracts

You can continue to succeed with infrastructure contracts despite defence sector challenges. The right business intelligence solution gives you the insights you need. You can win the right contracts and fulfil them on time and on budget.

Defence infrastructure projects take place at home and abroad. Many types of tenders are available, including:

  • Technical infrastructure
  • Utility management
  • Property management
  • Facilities management
  • Waste management
  • Estate sustainability
  • Estate Safety, Health, Environment, and Fire
  • Housing

The right intelligence helps you find tenders that match your company’s strengths.

Using business intelligence to improve your tender response

Taking a proactive approach to tendering gives you an advantage. You can prepare your procurement strategy and tender response in advance. You are better able to source materials and workers to make an accurate budget.

Early engagement depends on having high-quality information. You need to understand how changes in legislation or government policy could affect contracts relevant to your business. Having contact information for key decision-makers in defence tenders lets you start networking.

Historical data helps you plan for future contracts. You may want information such as:

  • Previous tender requirements
  • Whether your competitors have won business with certain buyers
  • Who the new competitors in your market are
  • What buyers are purchasing, from whom, and for how much

You can identify opportunities that will bring the most benefits to your business.

Get better insight with DCI

Defence Contracts International has more than 35 years of defence procurement experience. Our business intelligence solutions provide the insight you need. You can stay competitive despite the current period of inflation and global instability.

Tools from DCI will help you identify the best opportunities for your business. You can engage early and prepare to win more contracts. Contact us today to request a demo. Experience first-hand how easy it can be to find new defence opportunities and grow your business.