Inflation forecasts

Contractor respondents to our Winter 2021/22 survey once again ranked materials and labour availability as the biggest threat to the construction industry, with 40 percent ranking this as the top threat. However, this is a reduction from our Autumn 2021 survey where 83 percent ranked it the greatest threat, with 5 percent seeing further variants of COVID-19 and/or rise in flu and other illnesses leading to restrictions as the greatest threat and the remaining 12 percent seeing significant tax rises and delivery issues as the largest threat. These other threats were ranked by 30 percent of contractor respondents each as the top threat in the Winter 2021/22 survey.

As previously outlined, the construction industry experienced unprecedent volatility in costs in 2021. There were many factors behind this, including constrained supply as a result of 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.

It is expected that there will be less volatility in 2022 and the construction industry is now better equipped and prepared to respond to the challenges. Material and product price increases are expected to continue, however not at the same dramatic pace and levels seen in 2022. Energy price increases will remain a challenge in the production of some materials, and global shipping issues and strong demand will affect availability and cause extended lead-in times to be maintained.

With increased activity, labour shortages will become more apparent in 2022. ONS data shows that construction vacancies last year reached the highest level since 2001 when records began. Coupled with people revaluating their lives following the COVID-19 pandemic, an ageing workforce and figures showing that an estimated 10-20 percent of UK-born construction workforce are reaching retirement age in the next five years, it is expected that labour costs will increase in 2022 and will be the key contributing factor in price increases.

Inflation forecasts for the upcoming year (1Q22 to 4Q22) have generally remained steady, reflecting the anticipated impact of ongoing material and labour cost increases. In some areas, particularly Greater London and surrounding markets, defined spikes are being seen in some tender returns, reflecting particular challenges related to labour. In some other areas, materials and labour cost pressures are being slightly tempered by a more competitive market and effects of project approvals having been slowed/put back in 2020. Going forward in to 2023, inflation is expected to return to more typical levels as supply and demand balances and costs and supplies stabilise.

Now more than ever, it is important to consider inflation on a case-by-case basis considering the particular factors which may influence a project. This may be procurement strategy: for instance, a contractor reviewing inflation impact at the end of a second stage tender for a project with a long programme may take a different view to a contractor in a competitive tender situation for a proposal deemed quick to start on site and certain to go ahead. The nature and specification of the job could also influence inflation. It is also necessary to consider the local market for contractor capacity and labour availability.