German building-site stoppages threatened as supply shortages bite

Supply bottlenecks are now becoming acute on German building sites, as the effects of the war in Ukraine ripple through to add to existing logistical and supply chain problems across the globe. The German construction industry is calling for the revision of critical clauses in development contracts to protect parties from what are now becoming unavoidable delays on existing projects.

Germany's Federal Statistics Office has put the rise in costs for new residential construction in Germany at 14% more in February than at the same period last year. This was before the Russian invasion of Ukraine - later figures have yet to be confirmed, but anecdotally, things have become more difficult since - a view underpinned by Munich's Ifo-Institute in a recent paper.

In March, 37.2% of German construction companies reported experiencing shortages of critical materials, up from 23.5% in February. On civil engineering projects (Tiefbau), 31.5% of firms said they had shortages, up from 17.5% in February. Klaus Wohlrabe, head of research at the Ifo-Institute, said the Russian invasion had led to deep uncertainty in supply chains, with material prices for many commodities experiencing extreme volatility.

The area most affected is carpentry and woodwork, which have seen a rise of 33.9%, says the Statistics Office. But other materials have also seen hefty price increases.

Germany's construction firms are currently enjoying bulging order books, not least because of the huge drive to make older buildings more energy-efficient in line with government climate protection targets. And with a renewed commitment by the new coalition government under Olaf Scholz to boost housing, authorities last year issued building permits for 380,000 new apartment units, the highest number for 22 years. There is, of course, no guarantee that the buildings will actually be built, given the cost and supply constraints now affecting the whole industry.

According to Tim-Oliver Müller, CEO of the German Construction Federation, several major building projects could grind imminently to a halt due to a shortage of even basic materials. Suppliers of building materials are avoiding committing to deadlines, and price guarantees often have only validity for a few hours, particularly for steel-based products. Refineries have also warned of major reductions in bitumen production, a critical product for sealing roofs, buildings and foundations against water penetration.

Other materials to have soared in price since 2020 are wood (up 77.3%, depending on the type) and chipboard (up 23%), along with steel for steel-fixing (up 53.2%) and reinforced concrete (up 52%). The costs for skilled tradesmen have also risen - by up to 30% for carpenters, and at least 10% for roofers and plumbers.

Müller's colleague, Felix Pakleppa from the Central Association of the German Construction Industry (Zentralverband Deutsches Baugewerbe (ZDB)) points to conceivable longer-term consequences for the construction industry. Construction companies, which only receive daily updated prices for construction enquiries and frequently get no firm delivery commitments, were no longer effectively able to respond to construction enquiries and tenders, he warned. "Here we need another form of contractual cooperation, especially as the previous material price escalator clauses have proven to be ineffective." Such clauses serve to cushion price fluctuations, and he wants to overhaul these old practices.

Pakleppa is proposing to introduce a special clause into standard contracts that reflects and absorbs price fluctuations as well as supply bottlenecks, applicable also to existing contracts. Anything else means the system jamming up as contractors can't afford to commit to what are 'unforeseeable' price increases. A fairer, more partnership-oriented framework among contractual parties should now be legislated for, urge both Pakleppa and Tim-Oliver Müller, with agreement at ministerial, municipal and large building corporation level to resolve the logjam.

In a recent stark warning, the head of the world's biggest brickmaker warned of surging energy costs and "chaotic" EU policies that have led to production stops at many companies. Heimo Scheuch, CEO of Austrian company Wienerberger, which makes roof tiles and pipes as well as bricks, said that many of his company's smaller rivals had literally closed down operations over the winter months, leading to an undersupply of many products.

Across the EU and in the UK, hundreds of building contractors are going bust every month, he said, owing to the jump in materials prices and the shrinking pool of skilled workers. The EU's 'chaotic' policies on energy, particularly cutting carbon emissions, and labour were leading to the shortages. Knee-jerk decision-making, such as Germany's failure to propose alternatives to its aborted nuclear power programme, were helping to exacerbate the problem, he said.