Tender price inflation to soar to 10% this year

Aaron Morby 2 years ago
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Leading cost consultant Arcadis is warning the spectre of stagflation could hit construction as soaring materials inflation and risk allowances in tenders delay project pipelines.

It estimates that disruption caused by the Ukraine War has magnified existing supply chain problems adding 3 to 5% to the cost of typical projects.

This is even though materials sourced from Ukraine barely account for 1.2% of the value of construction’s imports.

A combination of energy and material price inflation, labour shortages and the high cost of risk transfer will fuel further tender rises, warns Arcadis.

As a result, the consultant’s tender price watchers have almost doubled their inflation forecast for the year.

Simon Rawlinson, Head of Strategic Research at Arcadis, said: “Shockwaves from the Ukraine War and the wider cost of living crisis combined to threaten the return of stagflation, the potent combination of low growth and high inflation last seen in the 1970s.

“This has resulted in the jump in our tender price forecast for 2022 to 8-10%.

“How contractors will respond to a slowing market will determine how quickly price growth returns to a more sustainable level.”

Tender price inflation for buildings is expected to peak at 8-10% in London and the regions, with increases of 10% in infrastructure.

From the latest Arcadis forecast entitled ‘The shadow of stagflation’.

Higher prices and difficulties in reaching terms that are acceptable to clients, contractors and funders mean that an increasing number of projects are being delayed.

In time this will result in lower levels of demand that, all things being equal will create a more competitive market.

Rawlinson said: “For 2023, with growing evidence of slowdown in the market, we do not believe that high levels of inflation will be sustained into next year.

“From 2024 onwards, we retain our view that construction prices will increase faster than background inflation as continuing scarcity of labour maintains pressure on contractors’ prices.

“As CPI returns to around 2%, construction prices will rise much faster, at 4-5%.”

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