The unprecedented levels of build cost inflation in the UK look set to continue beyond 2022 as the Ukrainian war continues. The increase comes as findings from the latest Builders Merchant Building Index show heavy building materials from Q1 2021 to Q1 2022 have increased 17.4% in value, but its volume is only up by 5.0%.
This trend – which kicked in at the start of 2021 – is further illustrated in the BCIS figures for the All-in Tender Price Index, which show an 8.5% rise 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, which has risen by £250 per tonne for steel sections, as reported by British Steel in March. Availability of materials is also problematic, leading to cost rises and 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 12 months on site duration. Use of the JCT fluctuations clause, for example, allows contractors to price at today’s prices with predetermined 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 for contractors to add 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, material price inflation has begun to soften and tender prices have gradually started to stabilise. The labour market, however, has remained challenging and soaring energy prices continue to affect material costs – oil prices have quadrupled since the early days of Covid.
The Ukraine conflict and related sanctions are affecting 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 are having an impact on steel prices.
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 the cost of materials with intensive energy input such as bricks and ceramics will rise further.
While construction has returned to normal levels of activity, most leading construction consultancies have raised their forecast tender price increases to 8% to 9% for the next 12 months, with some economists predicting an output slowdown due to a lack of consumer confidence in the market.
Contractors are adapting with a focus on early communication with their supply chains and more detailed analyses of risks. Clients are rethinking procurement routes with early contractor involvement to explore the most economic build methods to offset rising costs. There has never been a greater need for effective collaboration.
Dale Arden is a consultant quantity surveyor at consultancy calfordseaden