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Construction Inflation

UK Construction Intelligence Report

Construction Output

The latest data from the ONS showed that the output in November increased by 1.9% and by an average of 1.1% for the last 3 months, driven by a growth in new work. Over the last year construction output grew by 3.1%.

Tend Price Inflation

Whilst output has continued to grow the rate of growth has slowed in comparison to before 2017.

Data released by the ONS shows that the amount of new orders has fallen steadily since 2016. This trend continues with the Construction Products Association winter forecast suggests that activity will fall slightly in 2020 with £106bn of work in the pipeline before increasing slightly in 2021.

Demand Side Factors

Construction Inflation Influencers

  • Labour Costs

    2020 will see the rules governing IR35 rolled out into the private sector and at the end of the year and free movement for EU citizens will terminate. For an explanation of the potential problems recruiting staff and labour that will face the construction industry see the Impact of the IR35 rules in the Construction Industry section.

    During 2019 the average weekly earnings across all sectors rose by 3.2%. For the construction sector it was above 5% for most of the year before slowing down in November to the 3.2%.

    The cost of labour will be balanced by the prospect of low consumer inflation, a sector that isn’t working to full capacity and a slowdown in start on site and work in the pipeline. Against this exists a shortage of skilled workers and the problem of recruiting labour post Brexit. Contractors will face pressure as demand increases on paying the existing pool of workers. It is likely that labour costs will slow down during the early period of 2020 before increasing in the second half of 2020 as the sector will see some improvement and the prospect of EU workers moving away from the UK.

  • Material Costs

    Material costs are forecast to rise at around 2.5% through 2020, following raises of 5% in 2018 and 1.4% in 2019 due to a combination of stockpiling imported materials prior to the introduction of any potential tariffs and the natural fluctuations of building materials. Tensions between the US and Iran could see oil prices rise has been shown previously in periods of Middle Eastern tension.

    It is probable that tariffs will be introduced on imported materials. While only between 15 – 20% of construction materials are imported these may be subjected to tariffs coupled with the effects of border delays that may increase costs by around 5 - 6%. This will impact buildings by varying levels depending on of the use of imported glass facades and MEP equipment that tends to be imported.

    Once trade agreements are put in place this should ease tariffs and a slower global growth will ease the pricing demands on raw materials. Going forward from 2022 material price increases are likely to stabilise at around 3 -3.5%

  • Major Package Movements

    Currently demolition and groundworks packages are seeing costs soften as contractors are seeking to grow their order books. Presently, lifts are proving difficult to source amid reports they are being priced up to 30% above pre-tender estimates. A shortage of commissioning engineers exacerbates this situation.

    Facades, especially curtain walling and cladding, plus MEP have been seeing the largest increase, some materials such as timber and reinforcing bars have eased as Sterling has risen in the last 3 months.

TPI Predictions – Q1 2020

At this moment in time the construction sector is squeezed between demand and inflationary pressures. This is due to the combined effects of a global slowdown and uncertainty around the UK leaving the EU.

HM Treasury measured 1.3% growth in GDP during 2019. During that year the RICS and cost consultants cut their predictions for tender price inflation as demand soften and contractors looked to cut their prices to secure work for 2020 and beyond. The current predictions for UK Growth in 2020 vary from less than 1% to 1.5% based on a short-term upturn on the withdrawal agreement. If there are no signs of a trade agreement as the transition period ending confidence may fall.

Despite the increase in post-election confidence, until the new trading arrangements are known this will not instantly translate into an increase of new orders. Infrastructure works are known for their lead in periods and this means that start on sites and an increase in output costs are not likely to drive up costs in 2020. The paucity for new orders in 2020 coupled with the fall in start on site numbers will impact tender prices in 2020. We anticipate that contractors’ margins will continue to be squeezed as they seek to fill order books.

Tender increases during 2020 will be driven by labour costs. The introduction of the new IR35 rules, continued emigration out of the UK by EU workers and the ongoing shortage of workers in the sector being the main reason.

We anticipate that these will increase through the year if the new confidence turns into placed orders, forcing contractors to compete for labour resources.

With more knowledge of the post EU situation tender prices will increase through 2021 as the effects of increased demand, increased labour and material costs force contractors to pass on these costs while remaining mindful of the need to obtain orders.

In our previous report we provided a national forecast, in this report we have now included separate London and National forecasts.

Tend Price Inflation

Faithful+Gould also provide global indices for the major cities around the world based on input from our worldwide network of offices and publicly available material. Click on the link https://www.fgould.com/americas/articles/2019-global-location-indices for further details.