Turner & Townsend ups tender price forecasts as hopes fade for inflationary blip
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 percent 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 percent real estate tender price inflation in 2021, up from a Spring forecast of 1.5 percent. Whilst 5.5 percent is expected in 2021, the upside forecast suggests some projects may experience inflation of up to 10.0 percent. Following these highs, inflation is set to settle for a period before normalising to 4.5 percent in 2025. Infrastructure tender prices lag slightly behind but also show a high medium-term trend, forecast at 3.0 percent inflation for 2021, increasing to 5.0 percent by 2025.
The forecasts are underpinned by significant wage and product price rises, with a 14.4 percent quarter on year increase in average construction weekly earnings in Q2 2021, and 20.1 percent 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.
Andy Outram, Director and Scotland Strategic Lead at Turner & Townsend said:
“All the industry indicators are that we are heading into a very difficult period in Scotland with demand and shortages on construction materials driving up inflation and cost. Warnings are also being given about the availability of more sustainable materials. Most of the timber we use for construction here is imported from Scandinavia, and this is predicted to be seriously under pressure in 2022.
“It is absolutely critical that this doesn’t cause us to lose focus on industry change, particularly in terms of the net zero agenda. Instead, we need to see this as an opportunity to innovate and concentrate harder on the alternatives, including how MMC can be utilised as well as the reuse and recycling of materials. This should become the longer term default position in our thinking in the industry as we move forward into a changing post pandemic, post Brexit industry.”