Arcadis predicts UK construction price inflation into 2022

Arcadis has issued an updated tender price forecast for 2021, with inflationary pressures on buildings expected to peak at between 4% - 6% in London (4% - 5% regionally), and with increases of 5% - 6% in infrastructure. This latest upgrade reflects the extent to which the spotlight has moved from raw materials as the main cost inflation driver, to energy costs. 

Excavator Foto: MaxSafaniuk

The inflationary pressures that began to accelerate at the end of Q2 show no signs of fading, and there has been a rapid lift-off in costs during the second half of 2021, which is forecast to continue into next year.

Overall, the outlook for construction remains positive and business confidence is strong. Output reached £46.2 billion in Q3, which is in line with long-term trends dating back to 2016, while new orders for the first three quarters of 2021 were also well ahead of pre-COVID levels.

Increasing energy costs are bringing a second wave of inflation across a much wider range of construction materials. Due to the high energy intensity involved in their manufacture, products such as bricks, glass, cement and concrete are particularly exposed.

This is expected to have a much wider impact on prices than the raw materials boom, which mostly affected metals and timber. While certain sectors, including private residential or industrial warehousing, will continue to boom, other more price sensitive markets, like affordable housing, could see a slowdown in the market.

Arcadis has upgraded its overall 2021 forecast, driven by a combination of ongoing inflationary factors around construction materials and logistics, together with the emergence of new pressures around energy costs. Infrastructure is particularly exposed to the cost of materials, and so the forecast has been upgraded from 4% to 5-6% for 2021 with inflation expected to be between 3-5% in 2022.

Agnieszka Krzyzaniak, market intelligence lead at Arcadis, said, “Continuing high output proves that the strength of the construction industry shows no signs of abating, and the recovery continues. Strong new orders data indicates that the demand is still there and, as such, prices are not likely to decrease anytime soon. Although we can expect the upward pressure on costs to start easing in 2022, elevated inflation rates will still remain a defining feature of the market.”

“From next April, on-site operations will be impacted by the removal of the red diesel rebate. Cutting the idle and stand-by time of equipment will save on fuel, and has the added benefit of reducing carbon emission. In the longer term, switching to electric equipment, planning for the adoption of hydrogen and educating plant operatives in managing emissions will not only result in energy cost savings, but pave the way for more positive societal impacts too.”

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