Further cost hikes ahead for construction sector, warns Turner & Townsend
The construction sector should prepare for the possibility of sustained price pressures, according to Turner & Townsend’s latest UK Market Intelligence Report.
The global professional services business pinpoints to a forensic list of both demand and supply side factors that have maintained pressure on costs since last year, while also looking ahead to the potential impact of regulatory change around building safety.
The current cocktail of inflationary pressure is being led by rising material costs as well as burgeoning sector demand. Increased Government investment is combining with deferred work from the pandemic, and generally improving states of the domestic and global economy to support the recovery of demand in the sector. Meanwhile, reduced manufacturing capacity, freight delays, Brexit legislation, and fragmented global supply chains are pushing up costs and tightening supply chains.
Turner & Townsend forecasts that real estate tender price inflation will rise to 1.5% in 2021 up from -2.0% in 2020, with this increase continuing up to a potential 4.5% rise by 2025. Infrastructure tender prices are expected to follow the same trend and a firmer pipeline of work backed by significant Government investment means that inflation rises are forecast to exceed those of real estate at each time period – rising from 1.0% in 2020 to 5.0% by 2025.
While the UK Market Intelligence Report anticipates that some supply chain pressures will lessen in the short-term - as the industry moves through the disruption to global trade seen through COVID-19 and adjustment to a new relationship with the European Union. However, longer-term regulatory changes, including building safety, may come with an inflationary sting in the tail.
Four years on from the Grenfell Tower fire, the owners of residential buildings, particularly buildings over 18m high, are under pressure to replace existing cladding with fire compliant materials. High demand for safer, compliant materials, coupled with the impact of Brexit on the supply chain, has pushed up the price of key materials. For example, the cost of cladding rose by 5.2 percent in the 12 months leading to April 2021 alone.
Greater change is on the way in the form of the new Fire Safety Act (2021) and Building Safety Bill. The report argues that the industry needs to be prepared to manage rising costs associated with new burdens and responsibilities on the sector around material sourcing, skills, design management and build processes.
Andy Outram, director and real estate lead for Scotland at Turner & Townsend, said: “It’s great to see construction output and activity increasing in Scotland but a sustained economic recovery will take time. As growing client appetite and demand run into already strained supply chains, the bounce-back is likely to come with notable inflationary side-effects. But this must not become a reason to prioritise cost over quality – when it comes to factors like building safety, meeting the highest standards is non-negotiable.
“What matters is that businesses are prepared, and consciously control their costs and manage their risks. This means close collaboration and an intimate knowledge of your global and local supply chains. Now is the time to be decisive, and to listen and communicate with suppliers and contractors at every level – keeping a firm grip on the dynamics within the market.”
Nattasha Freeman, director for safety health environment and quality at Turner & Townsend, added: “The Fire Safety Act 2021 has already set in motion a raft of changes and further, more wide ranging, amendments are to be expected when the Building Safety Bill comes into force.
“Adjusting successfully to such changes will take collective effort across the supply chain and place tough demands on the sector’s already stretched safety specialists. The cost implications could be significant, but investing in preparation, adopting new processes to evidence, compliance and upskilling, will help mitigate some of these expenses.”