Rising inflation has been creating ripples in the construction industry for a couple of years now, but just when it seemed to be easing, the war between Russia and Ukraine triggered a chain reaction of events that are being felt here in the UK.
The conflict isn’t just causing a short-term problem, it’s put pressure on a series of existing issues in the construction industry, from supply chain issues to freight availability and port congestion, which were already causing costs and lead times to increase.
If tender prices continue to rise, it could threaten to destabilise the momentum many of us were experiencing at the start of 2022. Let’s take a closer look at what’s been happening and what forecasters are predicting for the rest of the year.
Although the recently announced government cap on energy costs will help to limit damage, no one is immune from the sharp increase in energy costs. While the media has primarily been focusing on the impact on citizens, soaring energy prices along with a squeeze on supplies are hitting the construction industry hard.
Materials such as brick, ceramics, cement, plastic and steel all require large amounts of energy to produce, and that’s before you consider transport, energy used during the construction process and keeping the lights on in the office.
When it comes to supply chain disruption, the positive news is that only 1.2% of imported construction materials in the UK come from Ukraine or Russia, so we’re less vulnerable to volatility than other regions.
The most affected materials are steel, timber, asphalt and glass, and UK buyers are looking to Japan and China for steel in particular. However, the greater distance also has an impact on transport costs and lead times, and sanctions imposed on Russia are impeding shipping.
Reducing levels of demand
The Bank of England is seeking to rein in consumer inflation caused by the energy crisis, which means UK interest rates are set to rise. The impact of that is likely to be less consumer spending, which will impact investor confidence.
A decrease over the next year or two of projects in the industry seems to be indicated by less liquidity among investors, and architects receiving fewer enquiries regarding new projects in line with expectations of less consumer spending.
Coupled with higher construction costs, projects may be deferred, delayed or cancelled. While this could potentially ease tender price growth, prices could continue to rise unless the market contracts. Historically, however, the market only contracts following a UK-wide recession.
Trying to accommodate changes in inflation or fix prices could be a mistake for firms, and even if market pressure is eased, issues such as the skills shortage, an ageing workforce and increasing pay could still have an impact on tender costs.
A volatile market
The construction market is sensitive and evolving rapidly. While there are lots of pressures contributing to rising tender prices, they shouldn’t be seen as blanket price increases. Projects will be affected in different ways, whether that’s the scarcity of materials, prices for some items increasing more than others, regional staff shortages or sharp increases in fuel costs for infrastructure projects.
Ultimately, that means it’s more important than ever to keep your eye on the ball when it comes to risk allowances, making sure to separate risk, project constraints and artificial uplifts in inflation.
If you’re concerned about the impact of the conflict in Ukraine on current or future developments, our team of industry experts can help you navigate the market, set realistic expectations and reduce risks as much as possible.
Get in touch on 020 7096 8235.