Autumn 2021 UK Market Report
Inflation forecasts
As previously outlined, the construction industry is experiencing unprecedent volatility in costs. There are many factors behind this, including the COVID-19 pandemic which has constrained supply. A surge in demand following reopening of economies has led to price increases causing shortages in raw materials and shipping container costs soaring.
ONS data shows both the highest level and largest month-on-month rise of vacancies in construction for 20 years. Gas shortages are causing energy price increases, adding further pressure to the supply chain and surcharges are starting to be seen for energy intensive products.
88 percent of respondents to our Spring survey thought that tender prices will increase during 2021, predominantly due to materials pressures. This has continued during the course of the year and 63 percent of respondents to our Autumn survey said that materials shortages will influence tender prices the most.
Contractor respondents to our Autumn survey ranked materials and labour availability as the biggest threat to the construction industry, with 83 percent ranking this as the top threat. In our Summer survey, 77 percent of contractor respondents said that materials and labour shortages were the top threat, with the remaining 23 percent instead seeing further variants of COVID-19 as the greatest threat.
However, there is more of a spread in our Autumn survey, with 5 percent seeing further variants of COVID-19 and/or rise in flu and other illnesses leading to restrictions as the greatest threat and the remaining 12 percent seeing significant tax rises and delivery issues as the largest threats.
The volatility in the market is expected to continue for the end of 2021 and early 2022 due to the ongoing material and delivery issues, which are now being influenced by energy price increases and shortages of HGV drivers. Tender price spikes have been and are being seen due to the conditions, some as high as 10-15 percent.
Now more than ever, it is important to consider inflation on a case-by-case basis considering the particular factors which may influence a project. This may be procurement strategy: for instance, a contractor reviewing inflation impact at the end of a second stage tender for a project with a long programme may take a different view to a contractor in a competitive tender situation for a proposal deemed quick to start on site and certain to go ahead. The nature and specification of the job could also influence inflation, such as a project with a steel frame that may be more exposed to volatility and require potential assessment of other options.
Going forward in to 2023, inflation is expected to return to more typical levels as supply and demand balances and costs and supplies stabilise. However due to ongoing challenges with labour supply and decarbonisation, materials prices are not expected to reduce as much as they rose.
*Summer report forecasts calculated for the equivalent period covered in this report have been rounded to the nearest 0.25 percent.
Note: This assessment is based on collated views from an internal survey of Gleeds’ experts. These forecasts reflect tender price inflation only and do not account for additional costs associated with extended programmes due to social distancing measures, delivery delays and the like. Inflation should be assessed for each project.
