The UK construction sector cannot ‘firefight’ inflation but needs to look at a range of levers to manage the prospect of tender price rises to 5.5% as far ahead as 2025, according to Turner & Townsend.

The global professional services business’ latest UK Market Intelligence Report (UKMI) shows large upward revisions to its quarterly forecasts. The business warns that the UK sector should prepare for tender price inflation to remain high in the short to medium-term on the back of rising client demand, heavily disrupted labour markets and dislocated supply chains currently being seen across the UK and global sectors.

The report predicts 5.5% real estate tender price inflation in 2021, up from a Spring forecast of 1.5%. Whilst 5.5% is expected in 2021, the upside forecast suggests some projects may experience inflation of up to 10.0%. Following these highs, inflation is set to settle for a period before normalising to 4.5% in 2025. Infrastructure tender prices lag slightly behind but also show a high medium-term trend, forecast at 3.0% inflation for 2021, increasing to 5.0% by 2025.

The forecasts are underpinned by significant wage and product price rises, with a 14.4% quarter on year increase in average construction weekly earnings in Q2 2021, and 20.1% material cost inflation in the 12 months to July 2021.

The report scuppers hopes that the inflation seen in the past months might subside after a quick economic rebound post-pandemic, with rises being sustained by a wider structural evolution of the UK economy as a result of Brexit, changing consumer behaviour following national lockdowns and the recalibration of the economy around climate action. 

The report argues that the need to tackle these structural changes – especially around net zero targets – means that the sector cannot rely on traditional routes to mitigate cost rises. Instead, it must adopt a programmatic approach which considers the impact of multiple cost drivers together.  

Martin Sudweeks, UK managing director of cost management at Turner & Townsend said: “Across the UK and beyond we are seeing structural changes post-pandemic that are reshaping our communities, our places of work, and our connections between the two. In the face of sustained and once in a generation pressure on resources, UK construction and the sectors it supports need to recognise that inflation is likely to stay high for the medium term.

“Tried and tested routes to curbing prices, from challenging specifications to recalibrating project timetables, are not enough. This is especially true when it comes to decarbonisation, where it is not a case of when or whether we can afford net zero, but how we do so. The sector needs to adopt a more programmatic perspective on managing costs, understanding how competing agendas will interact over time and how that impacts investment performance.”

Click here to download the full report: Weathering the Inflationary Storm.