Build Cost Inflation

Build Cost Inflation

The unprecedented levels of build cost inflation in the UK look set to continue beyond 2022 as we now face a new challenge: the Ukrainian conflict. This trend, which kicked in at the beginning of 2021, comes as BCIS figures for the All-in Tender price index show an 8.5% increase in tender prices from Q2 2021 to Q2 2022. The contributing factors behind this spike include Brexit, high demand for materials with limited supply, Covid-19, increasing energy costs and labour cost inflation.

These events have led to longer lead-in times for materials and increased tender prices. Material cost increases for the period have been substantial, notably steel. Availability of materials is also becoming an increasing problem, not only leading to cost rises but also programme delays.

Contractors have become more risk averse and sought to insert new contract clauses to protect their financial position and have been less likely to agree firm price contracts for anything over a 12 months on site duration. Use of the JCT Fluctuations clauses for example allows contractors to price at today’s prices with pre-determined inflation rates built in for future cost increases. This does not however give price certainty to clients and risk sharing arrangements are now being considered for projects with abnormal risks. There is also a growing trend where contractors are adding a contingency in their tenders for future price rises or in more extreme examples, declining to tender for projects where the risk is unacceptable to them. In the residential sector, additional considerations have led to further inflation with new regulatory control obligations and funding conditions such as zero carbon and Passivhaus standards.

Despite these challenges, there has been market growth from November 2021 as confidence has returned to the market. As supply chain issues have eased, materials price inflation began to soften and tender prices gradually started to stabilise. The labour market however, remained challenging and soaring energy prices continue to impact materials costs – oil prices have quadrupled since the early days of Covid-19.

The Ukrainian conflict and the related sanctions are already having an impact on the price and supply of materials and equipment. With Russia being a major supplier of steel products, the increasing market uncertainty and disruptions to international trade flows is having an impact on steel prices. British Steel reported that the UK price has risen by £250 per tonne for steel sections and is predicted to further increase as the demand rises. The conflict has also had an impact on the cost of fuel, given the high European dependency on the supply of gas and oil from Russia.  This means that the cost of materials with intensive energy input such as bricks and ceramics will increase further.

While construction has returned to normal levels of activity, most leading construction consultancies have raised their forecast tender price increases to between 8% and 9% for the next twelve months with some economists predicting an output slowdown due to a lack of consumer confidence in the market. Contractors are adapting to the changes with a focus on early communication with their supply chains and more detailed analyses of risks and opportunities. Clients are now re-thinking procurement routes with early contractor involvement to explore the most economic build methods to offset increasing costs. There has never been a greater need for effective collaboration.

By Dale Arden, Consultant Quantity Surveyor at calfordseaden