UK market intelligence: Driving efficiency for a sustainable future

Kristoffer Hudson

Associate Director

Our UK market intelligence report for Autumn 2022 explores the challenges and outlook for the UK construction industry as recessionary clouds gather over the economy, leaving some companies to review their business case for capital investment.

With consumer inflation running at a 40-year high, interest rates rising seven times in a row and the Bank of England (BoE) stepping in with an emergency £65bn for the UK’s financial system, the coming months could see some clients pause, defer or scale back their projects; or scrutinise cost savings before deciding to proceed. All of which could also lead some businesses to reassess their net-zero ambitions.

As the upcoming COP27 summit returns climate to the forefront of our minds, this edition of the UK market intelligence report will consider how the construction industry must work together to drive the efficiencies needed to keep these essential, sustainability ambitions on track.

Economic outlook: Inflation burns bright under recessionary clouds

The BoE has projected that the UK is likely to enter recession later this year, with GDP growth expected to be subdued well into 2025.

This warning comes against a turbulent economic backdrop, with the BoE base rate at a 14-year high, a quarterly reduction in construction new orders of 10.4 percent in Q2 2022, and a likely softening in construction output.

Monthly construction output fell by 0.7 percent in June 2022, the largest decrease since October 2021, and the October 2022 S&P Global Construction Purchasing Managers' Index (PMI) remained below the 50-point no-change mark.

As for the effect this is having on sustainable construction, activity levels remain resilient in new builds, as well as in the retrofitting of better insulation and energy-efficiency to existing properties. Yet as rising tender prices combine with growing fears of a recession, some clients may be tempted to push for cost savings by reining in or at least rethinking their sustainability goals.

Tender price inflation forecast

Our central forecast estimates that real estate tender price inflation will increase by 9.0 percent in 2022 on average. This is 0.3 percentage points higher than our Summer 2022 forecast. Though in 2023 this is expected to reduce to 3.5 percent for real estate, and 4.5 percent for infrastructure.

Despite much of 2022’s inflationary uplift in the first half of the year, inflationary pressure is still being felt as we approach the end of the year.

Moving into 2023, tender price inflation is likely to be more moderate, helped by weakening demand, supply chain recalibration and fiscal policy alterations.

And whilst material costs may remain elevated – reinforced by growing energy costs - increased production costs are now less likely to be successfully passed through the supply chain.

Programming greater productivity

Whilst there is a question mark around the duration and depth of the UK’s expected economic downturn, one thing is certain – the possibility of a recession will lead many clients to reassess the business case for their capital programmes.

Given that the most modern, energy-efficient technology and materials are rarely the cheapest, there’s a danger that this desire to cut costs now may lead the construction industry – and its clients – to compromise their sustainability ambitions.

The key to keeping costs in check – and thus achieving the organisation’s sustainability goals while also securing the best value – is to boost productivity.

The right blend of key tactics such as; sustainable procurement, keeping project team structures and processes lean, a digital-first culture across the supply chain, measuring embodied carbon alongside construction cost, and operating a programmatic approach, can all boost productivity levels whilst enduring environmental priorities.

Read the full report to see more economic data and insight, and to find out more about tender conditions in the UK.

For further information contact:

Kristoffer Hudson
Associate Director

t: +44 (0)113 258 4400