Five unexpected ways inflation could affect construction

The Office for National Statistics (ONS) last week revealed that consumer price inflation had hit 9 per cent in the year to April, while the Bank of England warned the cost of living was expected to rise further this year.

Climbing prices are nothing new to the construction industry. Bills for building materials rose in 11 of the 12 months of 2021, according to an index published by the government.

And with the war in Ukraine and the stuttering global recovery from the pandemic, the consultancy arm of contractor Mace warned in March that bid values could surge by more than 5 per cent this year.

But, as inflation grips the wider economy, what are some of the effects on the industry that you might not have thought about?

1. Incoming investment

British Land this week noted that it was seeing investors “rotate out of bonds and increase their allocations to real estate” because of high inflation. The developer said it was well-positioned for this trend. Essentially, in times of rampant price rises, most financial assets devalue in the short term. Taking a longer-term view, and putting cash into projects calculated to make a healthy return down the line, things start to look more attractive. Although it is a nuanced and wildly varying picture, there is definite potential for more cash to flow into commercial construction projects.

2. Two-tier decision-making

The rising price of construction, and the squeeze on household and corporate budgets, clearly acts as a brake on the industry. In just one recent example, development partnership Ambition North Wales said affordability was “the biggest risk” facing its £1.1bn portfolio of projects. Meanwhile, analysis by construction insight specialist Barbour ABI found the value of new work awarded to contractors recently hit its lowest level since summer 2021. But every cloud has a silver lining and, as inflation grips, some relatively cash-rich clients could look to bring schemes forward, rather than waiting for costs to rise further.

3. Focus on energy efficiency

With energy bills soaring at an alarming rate, will householders and leaseholders demand buildings with the energy-efficiency measures that the climate crisis has so far failed to truly make mainstream? Construction Products Association senior economist Rebecca Larkin believes properties with higher Energy Performance Certificate ratings could start attracting a premium in the market. “Will energy-efficiency work pick up in the repairs, maintenance and improvements market?” she asks. Similarly, will more clients and end-users demand heat pumps, solar panels and natural ventilation in new buildings?

4. Pay disputes

As the pound signs continue to spin at petrol pumps and supermarket checkouts, workers in the construction industry will be feeling the pinch as much as anyone else in the country. In a claim submitted earlier this year to the Construction Industry Joint Council, which sets the pay level for about 500,000 construction workers, the Unite union demanded a 10 per cent pay rise. Dozens of workers gathered to protest against a “derisory” offer made in reply. Separate demonstrations were held in March as pressure mounted on the contractor behind a Yorkshire energy-from-waste project to pay workers according to the terms of an industry-standard working-rule deal. With employers and employees both squeezed by rising costs, the potential for increased tension on site and even industrial action is very present.

5. Greater co-operation

Counterintuitively, the very clear threat of increased tension on site due to rising costs could actually drive efforts to prevent this spilling over – and ultimately lead to more collaborative behaviour. Irish minister for public expenditure and reform Michael McGrath this month introduced the Inflation Co-operation Framework for parties engaged under a public works contract. This lays out the approaches and parameters that companies working for the state can use to calculate additional costs attributable to material and fuel-price fluctuations – with the government bearing up to 70 per cent of the extra costs agreed. Larkin says similar mechanisms could emerge in the UK to boost co-operation and prevent costly disputes caused by inflation.

This article was originally published on Construction News.