While demand for new projects means many developers and architects are experiencing growth, practices need to manage sharp increases in inflation.
From shortages of materials and skilled workers to rising fuel costs, it feels like budgets are being squeezed from all directions. Financial experts are also warning that we may be entering a period of stagflation – that means high inflation, people living paycheck to paycheck, and a flat economy.
Unfortunately, those high unemployment rates don’t mean there’s a bigger pool of talent to fill construction vacancies. Skilled workers are retiring, unable to work in the UK due to travel restrictions, or being tempted into other industries by higher salaries. All things considered, it looks like the skills shortage is here to stay for at least a few years.
With growing concern that the tough times ahead will start to reduce client confidence and demand for new construction projects, let’s take a look at how inflation is impacting the sector, and what you can do to prepare.
The impacts of high inflation
Over the last few years, you’ve probably noticed lead times for material deliveries increasing, resulting in longer timelines for your projects. In turn, that makes it difficult to coordinate with contractors and causes costs to escalate.
With a skills shortage, firms are reluctant to cut costs by decreasing headcount. In fact, they’re more likely to be launching hybrid working schemes, offering flexible hours, and trying to give employees a better work-life balance to retain staff.
That makes it more important than ever to make sure cost estimates are accurate and take into account fluctuations in the market.
Lowering overheads
To combat inflation, firms are looking for ways to lower their overheads. Some are considering moving to smaller, cheaper offices with short-term leases as more staff work from home. Others are outsourcing services such as IT, HR and financial services, and leasing equipment instead of buying it.
However, many are implementing aggressive business development plans to increase their pipeline – rather than being cautious, they’re trying to bring in more business to reassure employees that their firm is the place to be during these difficult times.
Reducing risks
Rising costs are even impacting the bidding process. Tender price inflation is expected to rise from 6% in 2021 to 8.5% this year in the UK, which makes it difficult to estimate future costs. RICS issues regular forecasts around construction costs and predicted increases in tender prices across a five-year period, which we use to offer more accurate advice on projected costs for the next few years.
Inaccurate pricing can have a catastrophic effect on a project’s budget and return on investment. Unfortunately, this has led to an increasing number of companies getting into financial trouble or going out of business. For developers, this volatile landscape has made it more difficult to secure funding for new projects, especially if they have long build times.
So what can you do?
- Factor supply chain challenges into your plans Not only are materials more expensive, they’re harder to secure. This will impact completion times for both new and ongoing projects, so adjust your timelines.
- Revisit insurance policiesThe final costs of your project are likely to increase, and any losses will mean more expensive rebuilds. Make sure you’re not underinsured and that projects are accurately valued so you won’t be left out of pocket if anything goes wrong.
- Compare project budgets against current prices Be realistic about how inflation forecasts will drive up the costs of labour and materials, and make adjustments. Consider adding contingencies into your pricing models to cater for rising costs and uncertainty.
Get in touch
Partnering with a construction cost consultant can offer peace of mind that your projects are as future-proofed as possible and minimise unnecessary risks. To find out more about the cost implications of rising inflation, get in touch today on 020 7096 8235.
