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Tue July 16 2024

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Developers urged to start now to beat build inflation

18 May 21 The cost of infrastructure construction is set to rise 23% over the next five years, according to latest industry forecasts.

Arcadis’ latest Spring 2021 Market View, entitled Window of Opportunity, makes the case that with build inflation on the rise, now is the time to get digging.

Recovering demand and rising materials costs mean that inflation could become a defining feature of the market over the next few years.

Construction consultant Arcadis produces a quarterly analysis of the UK construction market to deliver tender price forecasts, to inform clients about what is going on in UK construction, helping financial decision. Its latest paper suggests that there may be less spare capacity in the supply chain than previously thought, with increasing pressure around the availability of construction materials emerging.

As a result Arcadis has upgraded its overall forecast, with a major acceleration in price increases for infrastructure, and a slightly more modest expansion in the buildings sector in 2022.  Infrastructure in particular is susceptible to pressures around materials availability and a shortage of specialist skills, it says, hence price increases of 3% and 5% being forecast for 2021 and 2022 respectively.

For the buildings sector, growth in the regions will be higher than in London. However, many projects are taking longer to get to the ‘shovel ready’ stage, so while Arcadis has maintained its forecast at 1% for 2021, delays are likely to translate into a steeper pace of growth from 2022 onwards, reaching 5% by 2025 as the market recovers.

Agnieszka Krzyzaniak, market intelligence lead at Arcadis, said:  “The conditions for investment are good, but with so many challenges on the horizon, the situation can change abruptly. At the moment, there is still some spare capacity available, but the shortages of construction materials create inflationary conditions that have already begun to outweigh any deflationary factors. Clients need to move quickly to take advantage of this window of opportunity. Any delays increase the potential exposure to much higher construction costs than initially planned for, as higher inflation becomes the new normal.”

Any construction workers hoping that this could mean substantial pay and salary rises in the coming years are likely to be disappointed. Arcadis says that wage inflation is flat.

Arcadis' tender price inflation (TPI) forecasts

  Regional Building Construction TPI London Building Construction TPI National Infrastructure Construction TPI
2020 -3% (-3%) -4% (-4%) 0% (0%)
2021 1% (1%) 0% (0%) 3% (2%)
2022 3% (2%) 3% (2%) 5% (4%)
2023 4% (3%) 4% (4%) 5% (5%)
2024 5% (5%) 5% (5%) 5% (5%)
2025 5% (5%) 5% (5%) 5% (5%)
Total 16% (13%) 14% (12%) 23% (21%)

Inflationary pressures

  • Materials – availability and logistics costs
  • Recovery in demand, less pressure to secure ‘must-win’ projects
  • Capacity constraints affecting specialist skills, particularly in infrastructure
  • Duties on materials from the EU where Rules of Origin apply
  • Implementation of IR35
  • Cashflow impacts from the introduction of reverse-charge VAT

Deflationary pressures

  • Continuing need to fill the 2021/22 order book
  • Competitive bidding triggered by contractors ‘trading-up’ to more complex projects
  • Wage inflation is flat. Levels of furlough indicate availability of workforce
  • Potential adoption of some digital practices and a post-Covid-19 productivity increase
  • Sterling strengthened (4% EUR, 12% USD)

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