Soaring inflation in the UK construction sector exacerbated by the conflict in Ukraine means that businesses should focus on securing a resilient supply chain and getting the basics right to guard against further shocks, according to Turner & Townsend.

The global professional services business’ latest UK Market Intelligence Report (UKMI) shows significant upward revisions to its quarterly forecasts – particularly the inflationary predictions for 2022.  This is driven by rapidly rising energy costs as the impact of the war in Ukraine resonates through global supply chains.

Turner & Townsend’s central forecasts for tender price rises in 2022 now sit at 8.5% for real estate and 6.0% for infrastructure, much higher than that of the Winter 2021/22 predictions of 4.5% and 4.0% for the same period. 

The Ukraine conflict has had a significant near-term impact on inflation, but these exceptional conditions come on top of layers of issues including pandemic and Brexit disruption. Despite relatively little direct reliance on oil and gas imports from Russia, the nature of the global market means that elevated energy prices are at the heart of the latest spike, with monthly indices for crude oil, diesel and premium unleaded increasing by 99.4, 33.8 and 30.5% month on year in March alone. This has impacted logistics costs as well as materials with energy-intensive manufacture processes such as brick, cement and steel.

Turner & Townsend’s analysis points to a sustained impact from these multiple factors through 2022 but indicates a settling of conditions thereafter, with long-term tender price forecasts for 2025 at 4.0% for real estate and 5.0% for infrastructure. 

The new UKMI report argues that businesses must keep cool heads in the face of these pressures, calling for pragmatic, flexible procurement and greater collaboration with the supply chain. It underscores the importance of getting the basics right – with clear planning that factors in time for early engagement with suppliers, better understanding and apportioning risk and maximising value over hitting target costs.

Turner & Townsend also warns that the major risk to the industry as a whole is that inflation distracts from the vital work being done by businesses to achieve and target wider goals such as net zero, driving productivity gains or embedding social value into their operations.

If tender prices continue to rise rapidly, Turner & Townsend warns that there could come a tipping point at which early-stage projects are put on ice and clients postpone their capital investment decisions in larger numbers than they are presently doing. Pointing to how the industry has navigated the disruption of the past few years, the report makes the case for immediate cost pressures to be considered as part of a programmatic approach to capital investment that targets these systemic challenges. 

Martin Sudweeks, UK managing director of cost management at Turner & Townsend said: “Now is the time for calm, clear and programmatic thinking – focusing on setting up projects for success with full recognition of challenging cost pressures and a plan to manage them that starts with getting the basics right. Contract scrutiny needs to be front and centre. Businesses must avoid panicked procurement in the hope of locking-in pricing, instead taking time to eliminate ambiguity that can be a bigger risk than inflation itself. 

“This is about picking the best team and ensuring you have capable and resilient contracting partners. Clients should map out the supply chain and identify weak links, then work to eliminate risk and where necessary share the burden of disruption. Those that successfully diversify their supply chains and build strong relationships with trusted suppliers will maximise resilience and benefit most long-term.”

Click here to download Turner & Townsend’s latest UK Market Intelligence Report, Spring 2022.