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Tue June 18 2024

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Arcadis raises inflation forecasts as contractors get bogged down

10 Jun While consumer price inflation in the UK appears to be returning to a more normal level, construction tender prices will continue to escalate, it seems.

Construction economists at Arcadis have made no changes to their inflation forecasts for 2025 but, looking further ahead, have raised their forecasts for 2026, ’27 and ’28.

Arcadis forecasts higher levels of construction inflation from 2026 onwards even as construction’s recovery struggles to take off in 2024 and 2025.  This will be due to resource constraints and the impact of delayed procurements on the future shape of the supply chain, it says.

Three months ago, Arcadis was predicating tender price inflation of 4% for building works for each year from 2026 to 2028. Now its 2024 Summer Market View report, published today, has raised this to 5-6% for each of these years.

Its forecast for infrastructure construction tender price inflation remains unchanged. (See table below.)

However, Arcadis also highlights a 'K'-shaped inflation trend in infrastructure, with varying levels of escalation across different sectors. Construction material prices are also on the rise after a period of decline, signalling potential shifts in the market, it says.

According to the Arcadis report, titled The only way is up, the mood in the construction sector is showing signs of improvement, triggered by growing signs of confidence in the property sector. However, headwinds are expected to delay the start of a new wave of construction projects. These include the new Building Safety regime and the slow progress of commercial and public sector schemes, which are likely to prolong difficult market conditions until mid-2025.

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Even though workload continues to shrink, clients are facing capacity constraints.  Many contractors have teams committed to stalled two-stage procurements, reducing market competitiveness, the report notes.  Delays to project starts are tying up contractors’ resources, limiting their ability to pursue new opportunities. This means that clients will continue to struggle to find contractors – not because their project is unattractive but because bidders are already committed to slow-moving schemes.

Arcadis' revised forecasts for tender price inflation (with previous forecasts from March in brackets)
Arcadis' revised forecasts for tender price inflation (with previous forecasts from March in brackets)

Simon Rawlinson, head of strategic research and insight at Arcadis, said: “Political parties promise change during election campaigns but there are few signs of improvement for the construction supply chain. In our Summer 2024 forecast, we expect challenging market conditions to persist. We foresee a more inflationary outlook for the recovery phase, especially from 2026 onwards, due to resource constraints. Present bottlenecks have various causes, some time-dependent and some market-dependent. Growth conditions are unlikely to improve in 2024 as blockers persist. By late 2025, with more projects and potential loss in industry capacity, conditions are set for an inflationary recovery.”

Ian Goodridge, the firm’s market intelligence lead, added: "Capacity issues caused by projects let on a two-stage basis create a 'holding pattern' where contractors are committed to resourcing uncertain projects. This situation leads to a paradox of falling workload and contractors claiming they are too busy, as the new work pipeline remains empty.  Clients need to engage with potential bidders at an early project stage to avoid the risk of a short bid list."

The full report can be found at arcadis.com

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