Market Commentary



The ongoing impact of the pandemic and the war in Ukraine are having a significant impact on the economy with inflation (CPI) in July up to 10.1% from 9.4% in June, with further increases forecast over the rest of 2022, driven by increasing demand and corresponding supply shortages.

This has led to 6 interest rate rises by the Bank of England this year, with further increases up to 2.5% by 2023 predicted.

GDP increased by 8% in 2021 and a 4% increase in 2022 is anticipated, although there is the distinct chance of a short-term recession towards the end of this year. Forecasts currently predict that this will be followed by increases of around 2% in each of the following three years.

Market Outlook

It is widely reported within the industry that Brexit (increased tariffs and product supplier delays), manufacturing delays associated with the Covid Pandemic, supply issues due to the conflict in eastern Europe and the energy crisis are resulting in unprecedented price increases across the UK.

In the latter part of 2021, BCIS recognised the impact of Covid and Brexit, where a sharp rise in construction tender inflation was seen from early 2021 with a further update published at the end of June. It is only in the last 3 months that the tender price increase forecast has started to account for the macroeconomic factors associated with the conflict in Ukraine, fuel price increases and removal of the red diesel rebate.

It is now clear that these ‘once in a generation events’ are impacting the manufacturing and construction industry within the UK. As a result, we are consistently seeing major fluctuations in contractor tender pricing along with material price increases driven by demand and increases in raw materials costs which are well in excess of the 3.9% previously forecast inflationary allowance for 2022.

The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions, the removal of the last remaining Covid-19 related restrictions. However, the figures could vary by up to 15% (+/-) per annum over the period of the forecast depending on the medium-term implications of Brexit on trade, the extent of continuing material shortages and resolution of the war in Ukraine.

Tender Price Update

Tender prices rose by 1.5% over the last quarter, the same as the previous quarterly rise. However, the annual rise increased by a further 1.5% to 6.4% when compared with the same quarter in 2021. Tender prices have been rising since the second quarter of 2020, but the rate of increase is forecast to increase further to 6.9% by early 2023 driven by strong cost pressures currently being experienced.

The forecast for the following 4 years indicates strong tender price increases of around 3% in 2023 and 4% per annum over the remainder of the forecast period, driven by improved growth in most sectors, giving rises more than input costs. Over the next five years tender prices are currently forecast to rise by 24% overall, a 2% increase compared to the last forecast.

Building costs rose by 1.0% in the last quarter when compared to the previous quarter and by 10.3% from the same quarter a year ago, with both figures similar to the previous forecast. Overall, costs are expected to continue to rise over the next 5 years, with increases around 3% per annum over the next five years, except for a dip in 2023 to 1.9%. Building costs are forecast to rise by 17% in total over the next 5 years, an increase of 5% from the previous forecast.

Materials prices rose by 1.7% in the last quarter and by 18.4% when compared with the previous year, a decrease of 1.6% from the previous forecast. A return to more moderate increases of between 2% and 3% per annum are now forecast from the end of 2022 with an overall increase of 15% over the next 5 years (2022 – 2027). The main risks to material prices are ongoing supply issues following the Covid-19 crisis, the war in Ukraine, oil prices, import tariffs and weak sterling exchange rates. Wage awards are still expected to be around 3% per annum for the next 5 years, in line with inflation, but with labour shortages expected to continue site rates are likely to see larger increases.

Construction Output Forecast

Total construction output increased by 1% in 1Q 2022 when compared with the previous quarter, and by 5% when compared with 1Q2021. This represents a similar increase to that identified in the previous report as most sectors continue their recovery from the sharp declines in output experienced in 2020. However, in overall terms, it remains 3% down from July 2020, with new work output following a similar trend.

Comparisons of new work output over the last quarter showed all sectors increasing. Over the last year most sectors also showed increases ranging from 5% to 10% but with a 17% increase for private housing, 30% increase for infrastructure and a 6% reduction for the private commercial sector. New work output is expected to rise by 3.3% in 2022, with the public non-housing and private industrial sectors now leading the recovery, and infrastructure and private commercial seeing reductions in 2024. Over the remaining period of the forecast annual increases will vary between 1% and 3% with a total increase of 15% over the period of the forecast (1Q 2022 to 1Q 2027).

Expenditure on repair and maintenance is also forecast to continue to increase by around 3% per annum, this is being driven by non – housing work as organisations continue to catch up on backlog works deferred by the pandemic.

To Summarise

Since the start of this year, increasing levels of volatility in construction supply chain costs have been seen across the industry which has resulted in significant cost increases being implemented by both product manufacturers and suppliers. Whilst there is no single cause responsible for these increases, changes in legislation, rapidly increasing energy prices and the war in Ukraine have all contributed to the levels of cost increases witnessed in 2022.

From analysis on ‘live’ tender projects throughout the country, tender returns align with the above, where we are seeing increases significantly above the BCIS tender price inflation forecast, with Main Contractor’s also qualifying their response to either limit period for acceptance or the desire to insert a fluctuations amendment. It is our opinion that tender prices have increased by approximately 10% within the last year which is well above industry standard forecasts, and we do not anticipate prices stabilising in the near future, with improvement not likely until 2023.

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