Construction sector recovery in the balance as tender price forecast rises
The UK construction sector needs to act now to boost productivity and counteract soaring inflation for labour and materials in the years ahead.
Our latest UK Market Intelligence Report (UKMI) shows another upwards revision to its quarterly forecasts. Central forecasts for real estate and infrastructure tender price rises in 2022 are 4.5 and 4.0 percent respectively, up from Autumn 2021 predictions of 3.5 percent for both. Long term forecasts also remain high at up to 5.0 percent as far ahead as 2025.
Forecasts for real estate and infrastructure
These forecasts are despite cooling growth rates of construction output and are instead led by cost-push inflation as material and labour shortages continue to compound. Our data shows contractor confidence decreased from Q2 to Q3 2021, at the same time as the Office of National Statistic (ONS) reported a quarterly fall in construction output of 0.9 percent.
Simultaneously, annual construction material costs from the Department for Business, Energy and Industrial Strategy (BEIS) rose 22.7 percent to November, and the ONS reports that construction vacancies rose by 43.3 percent from Q2 to Q3 2021.
The report suggests that subsequent pressure on labour costs, alongside the material price rises puts the industry in a vulnerable position with its recovery finely balanced. This is reflected in the level of insolvencies in the sector, which saw a quarterly rise of 18.6 percent in Q3 2021 according to the Insolvency Service – translating to a quarter on year increase of 80.2 percent.
Embracing digital tools
The new UKMI report argues that the industry’s focus must now be on driving efficiency and productivity improvements to limit the supply-side cost increases. Unproductive firms limit the sector’s adaptability and resilience against market unpredictability.
The report calls for businesses to embrace digital tools and off-site construction – and use this digitalisation to make Modern Methods of Construction (MMC) even more efficient. Above all, long-termism and a programmatic approach that is outcomes-based can drive future efficiency, by allowing the industry and its businesses both big and small to plan ahead.
Martin Sudweeks, UK Managing Director of Cost Management comments:
“UK construction has helped to power the economy through the pandemic and out the other side. But 2021’s recovery in construction output and demand has come at an inflationary cost, with global supply chains remaining disrupted and labour and material prices are under strain.
“The roots of this inflation are no secret to this industry, if we want to maintain the trends in growth we have seen and continue construction’s role as the economy’s powerhouse then we need to enact change, and fast. One route to achieving this is by driving better productivity via digitalisation, MMC and an outcomes-focused approach to major projects and programmes. Industry adoption of these strategies has been piecemeal for too long, particularly in digital, despite its potential for transformational change. Construction businesses that embrace the digital tools at their disposal and hold fast to a long-term programmatic approach will be those that should prosper in the months and years to come.”