Arcadis has updated its tender price forecast and predicts that inflation is set to continue into 2022, amidst the energy crisis
The updated tender price forecast for 2021 illustrates that the inflationary pressures on buildings are set to peak at between 4-6% in London and 4-5% across the rest of the country, and 5-6% in infrastructure. Accelerating prices reflect the shift in main inflation costs – from raw materials to energy costs.
The analysis forms part of Arcadis’ latest Autumn 2021 Market View ‘Lift Off’. The quarterly analysis of the UK construction market aims to predict a tender price forecast to inform clients about the latest in UK construction so that they can make appropriate financial decisions for projects and programmes.
It was at the end of Q2 that inflationary pressures began to escalate, and they show no signs of slowing down. In fact, costs have rocketed in the second half of 2021 and this is forecast to continue.
In total, business confidence is strong and the outlook on construction remains optimistic. In Q3 output reached £46.2 billion and so is in keeping with trends dating back to 2016. Plus, in the first three quarters of 2021 new orders were also well ahead of pre-COVID levels.
Inflation is hitting a wide range of materials
The second wave of inflation is reaching a much wider range of construction materials. Due to the high output of energy in their manufacture, products such as bricks, glass, cement, and concrete are all particularly affected.
This is predicted to have a wider impact on prices than the boom in raw materials, which affected metals and timber mostly. It is hard to say how the situation will unfold, especially when considering the different sub-sectors and regions.
Certain sectors including private residential and industrial warehousing will continue to reap in the benefits – but more price sensitive markets, like affordable housing, could see a slowdown in the market.
The result
- Arcadis has upgraded its overall 2021 forecast. This is driven by multiple ongoing inflationary factors around construction materials and logistics, as well as the new pressures created by rising energy costs
- Infrastructure will be the worst hit owing to the high costs of materials. In response, the forecast has been increased from 4% to 5-6% for 2021. Demand, however, remains strong
- Looking forward, in 2022 the forecast is less pronounced, but inflation is still set to sit between 3-5%
- In 2023 onwards, it is expected that growth in many sectors will ease, with inflation reducing back to 3% in London and regionally, and back to 5% in infrastructure
Comments from Arcadis
Agnieszka Krzyzaniak, market intelligence lead at Arcadis, said:
“Continuing high output proves that the strength of the construction industry shows no signs of abating, and the recovery continues. Strong new orders data indicates that the demand is still there and, as such, prices are not likely to decrease anytime soon.
“Although we can expect the upward pressure on costs to start easing in 2022, elevated inflation rates will still remain a defining feature of the market. The difference is that it will be mainly driven by rising energy costs and, with the energy used in manufacturing materials translating into around a quarter of total construction costs, the sector is particularly vulnerable to any prolonged price increases.
“As well as construction materials, another area exposed to energy price fluctuations – albeit to a lesser degree – are on-site operations. From next April, they will be impacted by the removal of the red diesel rebate. However, there are a number of short-term measure that clients can take now to reduce their exposure to risk.
“For example, cutting the idle and stand-by time of equipment will save on fuel, and has the added benefit of reducing carbon emission. In the longer term, switching to electric equipment, planning for the adoption of hydrogen and educating plant operatives in managing emissions will not only result in energy cost savings, but pave the way for more positive societal impacts too.”
