It is tempting to start claiming that we are reverting to the 1970s because of current energy price increases and global political instability. 

Paul Finch

Paul Finch

This is understandable and in some ways justifiable: the results of mid-East conflict and subsequent oil price increases from 1973 onwards injected massive cost inflation into the UK economy, resulting in near-chaotic market conditions in the middle of that decade.

However, it needs to be said that we are not starting from the same economic basis in 2022, and making parallels with previous historical eras is a dangerous game – even for historians.

The worrying thing for the UK property sector currently is the increase in building cost inflation, which had been modest over the last decade. That all changed as a result of the illegal Russian invasion of Ukraine, and the resulting squeeze (because of sanctions) on oil, gas and other material supplies.

Quantity surveyors (sorry, cost consultants) are now writing in cost increases of up to 15% in anticipated construction costs and, needless to say, the entire supply sector is sucking air through its collective teeth if asked whether things will get any worse. There are already instances of force majeure being invoked by contractors, claiming that war in Ukraine is making it impossible to obtain materials and, therefore, building contracts are void. In some cases this may be true, but there is a regrettable temptation for the supply sector to renege on agreed terms if there is a possibility of renegotiation, which will generate bigger returns. It is the dark side of a sunny market economy.

One hoped that this sort of behaviour would stay confined to the market in provision of prefabricated units or white goods, but now it is extending to basic items such as steel.

Development site

Source: Shutterstock / Guitar Studio

This will not be unfamiliar to property professionals with long memories. They will also recall steps that can be taken to mitigate the unpleasant prospect of supply shortages and cost increases, but these need to be thought through and checked against the wisdom of exactly those professionals who have been through all this before.

For example, it could make sense for clients to pre-empt hand-waving by contractors about the difficulties of obtaining materials or products by buying them directly in advance.

In any event, the requirement to check on availability should apply not only to contractors and subcontractors but also be part of the specification conversation. The relationship between specification and purchase, rarely discussed anywhere other than in the offices of nerdy property types and architects with an obsessive interest in process, is currently brought into sharp focus.

Why specify anything that is certain to be a problem? But how can specifiers guarantee availability – and come to that, how can contractors? Relationships matter here, as long-term contractual arrangements can be used as leverage, not so much in the negotiation of cost, but in the guaranteeing of supply at the necessary time.

Cost crisis

As far as cost is concerned, we are a long way off the cost of finance that made the mid-1970s such a nightmare. The price of materials is, of course, important but not as much as the cost of borrowing or the price of land or buildings.

Current building cost inflation is worrying, especially if minor cost increases make a project marginal or loss-making. But you might argue that if the fundamental value of a development is dependent purely on fixed construction prices, it has been wrongly assessed in the first place.

In recent decades, there has been a mistaken attitude to construction cost, which is that it takes third place behind cost of land and cost of finance. This has resulted in unreasonable pressure to downgrade the standard of development, particularly in the housing sector, to mitigate the excessive prices paid for sites and/or the financial structures created to underwrite development.

In the medium term, if construction costs increase, then the price paid for sites or buildings purchased for regeneration will diminish – instead of being regarded as some form of God-given fixtures in a valuation universe that treats design, specification and delivery as essential but otherwise unimportant.

What is happening to costs currently reminds us that ‘developing’ is a verb – live, active and dynamic – even if the outcome, ‘development’, is a noun describing the static result of all that design, specification and construction.

Paul Finch is programme director of the World Architecture Festival