Inflation forecasts

There was wider distribution of different challenges ranked as the biggest threat to the construction industry.

In our Autumn 2022 survey, contractor respondents ranked materials and labour cost escalation as top — with 46% considering it the biggest issue. This time, our Winter 2022/23 survey responses show investor confidence as being joint main concern with cost escalation. The wider economy was ranked by 20% as their most significant worry.

The Russia-Ukraine war has dropped from being the perceived second biggest threat, to being the concern ranked sixth largest by contractors.

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.

Energy price challenges also remain, 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 Winter 2022/23 survey said that the industry is still busy and schemes are progressing — rising to 25% from 20% in our Summer survey. The increase from non-contractor respondents is less, up just one percentage point.

The number of contractors saying that the current challenges are impacting growth of the industry reduced by ten percentage points between our two most recent surveys. The amount of non-contractor respondents saying the same generally remained constant, with only one percentage point increase between autumn and winter.

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 committed investment of £600 billion of capital spending by government as part of the Autumn Statement.

There is a drive for retrofitting buildings to improve energy performance. Clients are keen to reduce energy use to minimise running costs and ensure that stock is competitive in the market. Research from MSCI shows that there is premium for sustainable offices; it’s reported there is now a gap of 35% in Paris and 25% in London of buildings with sustainability ratings, such as BREEAM and LEED, compared to those without.

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 essential, as this impacts whether the cost uplifts are fully incorporated, or a risk premium is added.