- Arcadis once again upgrades 2021 construction tender price inflation forecast to 3% following evidence of challenges arising from accelerated recovery
- Unprecedented construction materials price increases and shortages creating challenges for projects
- Managing risk should be key priority for clients, amidst rapid expansion of construction sector
(8 September 2021) – A much faster than anticipated recovery has prompted Arcadis to once again upgrade its tender price forecast for Summer 2021, as inflationary pressures continue to grow. For the construction sector, which has expanded rapidly in the last few months, product availability issues and escalating materials costs have created challenges for on-going projects. The viability of new schemes could potentially be threatened unless early intervention measures are put in place, Arcadis warns.
This analysis comes courtesy of Arcadis’ latest Summer 2021 Market View, entitled ‘Gathering Storm’. The quarterly analysis of the UK construction market looks across sectors and regions to deliver a tender price forecast to inform clients about what is going on in UK construction, helping financial decision making for projects and programmes.
Materials costs have risen by an average of 15% in 2021 alone. Compared to the long-term trend of 3%, this near-record increase in the cost of construction materials, combined with long-term logistics challenges and a lack of capacity - particularly in haulage and distribution – is pointing to a gathering inflationary storm. This is further exacerbated by a strong new orders book, which increased by 10.7% in the quarter to reach £18.3 billion, surpassing pre-pandemic peaks. This has taken away some of the pressure on contractors to win work, further reducing competitiveness in a market that is already highly aware of the inflationary trends at hand.
As a result:
- Arcadis has upgraded its 2021 forecast, bringing inflation forward and increasing tender price rises for buildings to 3% this year, while easing 2023 predictions.
- London in particular will see more inflation than originally anticipated, with 25% of the value of recent new orders located in the capital.
- Infrastructure remains susceptible to pressures around materials availability, hence an upgraded forecast of 4% for 2021, although Arcadis has held its previous forecast of 5% for 2022 onwards.
As lead times for many projects have been extended, there is a risk that both clients and contractors could face additional costs which, in a worst case scenario, could undermine the overall viability of a project. Mitigating risk is therefore a key priority, and clients should consider procurement options that best balance competition with how attractive the project is to bidders. Another option for securing a competitive initial price could be to consider including risk sharing mechanisms in the contract. However, this is a calculated move that should only be considered if bidders are willing to adjust their bids, Arcadis cautions.
Simon Rawlinson, Head of Strategic Research and Insight at Arcadis, said:
“The challenges currently being experienced by construction are a clear indicator of the extent to which the market has been a victim of its own success. We’ve seen an uptick of almost 20% in levels of activity since the last quarter, but now, thanks to increases in material prices and availability issues, there is a very real risk of project delays, both on-site and in procurement. The situation is unlikely to stabilise before 2022, and so the industry needs to find a way to manage these price increases and mitigate any potential negative consequences. There is no silver bullet, but more transparency and a more equitable sharing of risk will both be crucial when it comes to avoiding unnecessary project delays and cancellations.”
A further consideration – and one new feature of inflation over the past year – has been a rapid increase in the cost of carbon credits, which now account for as much as 22% of the cost of cement, and 14% of aluminium billet. As the net-zero agenda rapidly gains in importance, carbon taxes will play a crucial role in reducing consumption and incentivising new technologies, particularly in hard to abate sectors such as steel or cement.
As Agnieszka Krzyzaniak, Market Intelligence Lead at Arcadis, explained:
“The price of CO2 has already doubled in the last 12 months to £54 per tonne and, as the number of credits available in the market is being reduced, it’s only going to keep going up. Estimates vary, but we could be looking at carbon prices rising by as much as two or three times by 2040. Unfortunately, clients have very little control over their exposure to carbon pricing, but they have an important role to play in driving emissions reduction.
“Construction decarbonisation can be achieved either by transitioning to innovative processes and products or implementing carbon capture and storage. Creating the market for low carbon products will be crucial. For clients, paying attention to the specification of materials and looking for low carbon alternatives will be key when it comes not only to mitigating costs, but also meeting wider net-zero goals.”
