Inflation forecasts

Contractor respondents to our Autumn 2022 survey once again ranked materials and labour cost escalation as the biggest threat to the industry, although the proportion fell from 54% in the summer to 46%, with the proportion identifying the Russia-Ukraine war as the largest issue rising to 34% from 19% last time.

Materials availability was not ranked as the greatest threat by any Autumn contractor respondents, while investor confidence grew as a concern and increasing COVID-19 cases returned as a top-ranked risk.

Significant materials and product cost escalation has been seen in response to the conflict and whilst cooling demand has helped to stabilise increases and instigate some reductions, prices are expected to remain significantly elevated in comparison to pre-pandemic levels. There are also renewed energy price challenges causing increases to some materials alongside labour and skills availability issues, with further pay pressures as a result of the cost of living crisis.

More contractor respondents to our Autumn survey said that the industry is still busy and schemes are progressing — up to 20% from 15% in our Summer survey. However, non-contractors saying the same reduced from 27% in the summer to 16% in the autumn.

Nearly 80% of contractors and 70% of non-contractors said that the current challenges are impacting growth of the construction industry.

There is some evidence of the supply chain being keener to tender projects, although caution remains.

If projects are paused due to viability issues, contractors may start to take a view on overheads and profit and risk profiles, to maintain pipeline. However, it is worth remembering the strong pipeline of projects, particularly the continuation of large infrastructure programmes, as well as the need for investment to support transition to net zero carbon and defence and energy security priorities.

As per our previous advice, it is important to consider inflation on a case-by-case basis; factors such as size, sector, specification and procurement and tendering strategies may all influence tender prices. Market appetite is also important, as this impacts whether the cost uplifts are fully incorporated or a risk premium is added.