Inflation forecasts

Contractor respondents to our Spring 2022 survey ranked materials and labour cost escalation as the biggest threat to the industry, with nearly half (46 percent) ranking this as the top threat.

The Russia-Ukraine war was identified as the second-largest threat, followed by investor confidence and materials availability.

In our Winter survey, materials and labour availability was ranked as the biggest threat to the construction industry.

The construction industry experienced unprecedented volatility in costs during 2021. There were many factors behind this, including constrained supply resulting from the COVID-19 pandemic. A surge in demand was seen following the reopening of economies which led to price increases, shortages in raw materials and shipping container costs soaring. Gas shortages caused energy price increases, adding further pressure to the supply chain and surcharges were seen for energy-intensive products.

2022 started more steadily as whilst issues remained the construction industry was better equipped and prepared to respond to the challenges. Material and product price increases were expected to continue, although not at the same dramatic pace and levels seen in 2022.

However, Russia’s invasion of Ukraine changed the picture once again and the issues with commodities price escalation and international trade disruption have meant an increase to our previous inflation forecasts.

Significant cost escalation is currently seen. Later in the year there is suggestion that prices for some key materials may reduce slightly due to cooling demand. For instance, it is anticipated that European steelmakers may concede price discounts later in the year/early 2023 to boost order intake which is becoming subdued due to the escalating costs. However, prices are expected to remain significantly elevated in comparison to pre-pandemic levels.

The same may be true for other parts of the supply chain. 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 economic growth, levelling up and the transition to net zero carbon.

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.