Build now or face increased inflation, Arcadis warns

With the UK economic recovery well underway, Arcadis has cautioned that the window of opportunity for investment in ‘shovel-ready’ schemes is finite and could close very quickly. 

Recovering demand and rising materials costs mean that prices could rapidly increase, with inflation becoming a defining feature of the market over the next three years. 

This analysis comes courtesy of Arcadis’ latest Spring 2021 Market View, Window of Opportunity. The quarterly analysis of the UK construction market looks across sectors and regions to deliver a tender price forecast to inform clients about what is going on in UK construction, helping financial decision making for projects and programmes.

There are signs that confidence is returning to UK construction. According to the latest Arcadis Sentiment Index, 60% of experts surveyed are seeing a growth in activity – a significant increase from 44% since the last quarterly Market View was published at the end of January. Meanwhile, construction output held steady in January and February 2021, and in March it finally reached pre-Covid levels. The estimated value of new contracts in Q1 2021 exceeded £23bn; a 2% improvement on the same period the previous year.

However, recovering demand has coincided with increasing pressure around the availability of construction materials, and concerns regarding long-term capacity in the supply chain. The full extent of the financial stress is only now becoming apparent. This, combined with a buoyant new orders pipeline, suggests there may be less spare capacity in the supply chain than previously thought. 

As a result:

• Arcadis has upgraded its overall forecast, with a major acceleration in price increases for infrastructure, and a slightly more modest expansion in the buildings sector in 2022;  
• Infrastructure in particular is susceptible to pressures around materials availability and a shortage of specialist skills, hence price increases of 3% and 5% being forecast for 2021 and 2022 respectively;
• For the buildings sector, growth in the regions will be higher than in London. However, many projects are taking longer to get to the ‘shovel ready’ stage, so while Arcadis has maintained its forecast at 1% for 2021, delays are likely to translate into a steeper pace of growth from 2022 onwards, reaching 5% by 2025 as the market recovers. 

Agnieszka Krzyzaniak, market intelligence lead at Arcadis, said: “The conditions for investment are good, but with so many challenges on the horizon, the situation can change abruptly. At the moment, there is still some spare capacity available, but the shortages of construction materials create inflationary conditions that have already begun to outweigh any deflationary factors. Clients need to move quickly to take advantage of this window of opportunity. Any delays increase the potential exposure to much higher construction costs than initially planned for, as higher inflation becomes the new normal.” 

A further cost consideration for the construction industry as it looks towards recovery is the increasing focus on net-zero, following the government’s sixth carbon budget and adoption of a 78% reduction in carbon emissions by 2035. The focus of the net-zero effort on reducing operational carbon footprint will further increase and greater attention will turn towards the significant embodied carbon in the construction process. The construction sector is at an early stage of adoption but is making big strides with initiatives like ConstructZero. However, if the pace of transition is not accelerated, the sector will begin struggle to find the capacity to make its contribution to net zero goals.

Ben Harris, UK climate change and sustainability director at Arcadis, said: “When it comes to net-zero, we need to make every penny count, managing costs and delivering at the scale and speed necessary to meet the challenge. As construction starts to reboot, it is crucial our industry embeds sustainability into its projects, and we take advantage of the reduction in the cost of key technologies in achieving net-zero goals. As prices of carbon-intensive products rise, a failure to decarbonise will increasingly threaten the economic viability of construction projects. There is an imperative to act now to build capacity, and the sooner this starts, the better.”

Click here to download the full UK Spring 2021 Market View: Window of Opportunity.