Here’s to 2022 and rising optimism

Optimism continues at the start of 2022, with 36 percent of respondents to our survey saying that tender opportunities increased in the last quarter of 2021 and 46 percent forecasting that tender opportunities will increase in the first quarter of 2022. This continues a trend of increased optimism over the course of 2021.

2021 saw huge challenges for the construction industry from the COVID-19 pandemic and Brexit. There was significant materials price escalation, along with materials availability issues and vastly extended lead-in times. Towards the end of 2021, the pressures seemed to be alleviating slightly — demonstrated by the Department for Business, Energy and Industrial Strategy’s (BEIS) All Work materials price index showing no change in the month to November 2021, compared to a 22.7 percent increase in the year from November 2020. This was the first time that the index had not increased in the month since September 2020, when costs fell 0.1 percent compared to the previous month.

Energy prices started to increase at the end of the year due to a reduction in gas supplies. This has impacted the cost of production for materials, particularly for those which are energy-intensive such as steel, and price rises and surcharges have started to be seen. These issues are expected to continue into 2022 driven by strong global demand, a shortage of heavy goods vehicle (HGV) drivers, global shipping issues and international tensions.

Labour issues reared again during 2021 as activity increased — 17.5 percent of contractor respondents to our survey reported labour supply issues in the first quarter, increasing to 80 percent by the fourth quarter. Figures from the Office for National Statistics (ONS) show that the number of construction workers in London from the EU fell 54 percent between April 2017 and April 2020. Data also shows that the UK-born construction workforce is ageing, with 10-20 percent reaching retirement age in the next five years.

The reduction in EU labour is particularly impacting London as prior to Brexit, London was dependent on migrant construction workers with over half the workforce being from the EU or the rest of the world. The Mayor of London, Sadiq Khan, recently called on the government to create a temporary visa scheme to help sectors like construction that are struggling with shortages of workers, highlighting the concern regarding construction skills shortages and the impact that these could have on recovery from the pandemic. Out of respondents to our survey, 86 percent said that the construction industry has not yet seen the full impact of Brexit and labour is expected to replace materials as the key driver of cost increases in 2022 as labour issues ripple outwards from London.

Data from the ONS gives provisional estimates that public sector borrowing reached the equivalent of 15 percent of gross domestic product (GDP) in the financial year ending 2021, which is the highest ratio since the end of World War Two when it was 15.2 percent in the financial year ending 1946. As well as recovery from the COVID-19 pandemic, public spending will be required to tackle other challenges. These include costs associated with an ageing society, balancing inequalities arising from the pandemic/levelling up and meeting other challenges such as the transition to net zero carbon.

With the Consumer Prices Index (CPI) from the ONS rising to the highest level since March 1992 in December 2021 and inflation being widely expected to peak at 7 percent in April 2022 when the domestic energy cap is reviewed, the government is facing calls to support households with the soaring cost of living.

These stresses are putting pressure on spending and the government confirmed at the end of 2021 that the eastern leg of HS2 to Leeds and a full high-speed east-west line linking Manchester to Leeds will not be built. Instead, scaled back rail investment is planned, made up of regional upgrades and some new lines. This move has been met with anger and disappointment in the north of England and the Midlands, particularly due to the government’s well-documented levelling up agenda, with concerns that the scaling back will mean reduced onward investment and benefits being delivered.

Out of respondents to our Winter survey, 44 percent said that they are concerned that the announcement means that other promised investment in infrastructure will be reduced or scrapped. Some respondents said that rising costs and debt meant that it was “inevitable” that available funding would be impacted, reducing government spend. However, others were more optimistic that the monies will be diverted to other infrastructure schemes.

Data from the ONS shows that although construction output is 1.3 percent above its February 2020 level, the recovery to date at a sector level is mixed, with infrastructure at 49.3 percent (£923 million) above and private commercial at 28 percent (£698 million) below their respective February 2020 levels in November 2021. Our survey saw 94 percent say that there is insufficient infrastructure in place to sustain the government’s net zero carbon targets. This highlights the importance of infrastructure investment in the transition to net zero carbon, that investment is required in energy sources and distribution for electrification to move away from fossil fuels. There also needs to be investment to integrate sustainability to become a way of life, for example, investment in public transport and electric vehicle charging points.

Whilst there have been many challenges brought about by the COVID-19 pandemic, it has also helped to introduce and speed up the adoption of new procedures and ways of working, which will benefit the construction industry for years to come. There has been increased use of technology, digital tools and data and we have also seen investments in modern methods of construction (MMC) and changes to the way people work. It is hoped that increased flexibility in both working hours and where people are based, will attract new people to the industry and retain existing workers. Another key development has been the focus on climate emergency and meeting net zero carbon targets and this is now strongly influencing the built environment across design, procurement, construction, cost-in-use and asset value.

Underpinning these themes is collaboration: increased collaboration has been seen across the industry to overcome the issues faced. Longer-term partnerships will help to form the basis for improvement and innovation, and it is hoped that this shift will continue to formulate a more sustainable and productive construction industry to help meet the UK’s greater aspirations to transition to net zero carbon and for a strong and resilient economy.

Overall, it is anticipated that the challenges will be less severe than in 2021, and of course, the industry now has much more experience in dealing with the impacts. Continued growth is forecast for construction due to a strong private housing outlook and investment in rail, health, education and industrial construction. Our teams located across the UK remain your constant advisors to support your growth. We hope Moving on up will prove a useful guide to aid your decision making as you move ahead through the coming months.