Inflation forecasts

A continuing trend from our last report is a wider spread of threats ranked as the most significant issue for the construction industry going forward.

Many of the issues are interlinked. Investor confidence, materials and labour cost escalation, as well as the wider economy were seen as the biggest threats. Previously, these were also the top three perceived issues.

Labour availability increased from being ranked the top threat by 9% of respondents in our Winter 2022/23 survey to 17% in our latest survey.

Similar levels of respondents in our Winter 2022/23 and Spring 2023 surveys said that inflation is impacting the viability of schemes.

Feedback is that some schemes are slower to progress to site. One example was schemes previously given the ‘green light’ in principle by clients, but which were subject to pre-construction processes such as land acquisition, planning and design development, are reappraised prior to entering into contract. Solutions then need to be found to preserve viability, such as value engineering, retendering and redesign.

Viability poses challenges for both public and private sector projects. Many schemes are going ahead, but the scope is sometimes scaled back to enable delivery. Overall costs are not reducing, so the longer the review process, the more difficult the position.

The majority of respondents to our survey, 65%, said that they are noticing increased confidence across the industry, thanks to an improved wider economic position.

The predicted fall in construction output, which tends to stabilise pricing levels, has not materialised. Public sector demand is stable, with capital investment reaffirmed in the spring budget. Although private sector investment is feeling the combined effects of high interest rates and inflation, projects continue.

A strong pipeline remains, driven by infrastructure, energy and retrofitting projects. Significant global investment in infrastructure and energy projects also influences resource levels and input costs.

Supply conditions are improving, reflecting greater availability of construction products and materials, alongside fewer logistics bottlenecks though labour shortages remain a major challenge.

Both regional and sector variations characterise the market, based on project pipelines which directly influence risk acceptance and appetite.

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.

Volatility remains as the construction industry, like the rest of the UK economy, will continue being prey to changes in global forces — notably the Russia-Ukraine war and the progress of the Chinese economy.