Further price uncertainty for construction materials is being caused by rising energy costs fuelled by a second wave of inflation and will lead to high price inflation continuing well into the new year, according to construction consultant Arcadis.

New Civil Engineer reports that Arcadis has issued a tender price forecast for 2021, which predicts that inflationary pressures on buildings will peak between four and five per cent nationally, and between four and six per cent in London, and increases of five to six per cent in infrastructure.

As inflationary pressures escalate, this latest upgrade reflects the extent to which the spotlight has moved from raw materials as the main cost inflation driver, to energy costs.

Arcadis’ quarterly analysis of the UK construction sector, Autumn 2021 Market View, looks at all sectors and regions to deliver a tender price forecast so clients can be informed of activity in UK construction, allowing for better financial decision making for developments, schemes, and projects.

The report revealed that inflationary pressures that began at the end of the second quarter do not show signs of slowing down, and there has been a huge increase in costs during the latter half of 2021, all of which is forecast to continue into 2022.

It states that overall, the outlook for construction remains positive and business confidence is high. Construction output reached £46.2 billion in Q3, which lines up with trends that date back to 2016.

The report added that new orders for the first three=quarters of 2021 were well ahead of pre-pandemic levels.

However, the construction consultant warned that rising energy costs will bring a second wave of inflation across a far wider range of construction materials. Due to the high energy levels required for manufacture, products such as bricks, glass, cement, and concrete will be particularly affected.

This is expected to have a much wider impact on prices than the raw materials boom, which mostly affected metals and timber.

The situation is still uncertain, not only across different sub-sectors but also regionally. Some sectors such as private residential and industrial warehousing will continue to grow, but other more price sensitive markets such as affordable housing may experience a slowdown in the market.

As a result, Arcadis has upgraded its overall 2021 forecast, driven by a combination of ongoing inflationary factors around construction materials and logistics, together with the emergence of new pressures around energy costs. 

The consultancy firm said infrastructure is particularly exposed to the cost of materials, and so the forecast has been upgraded from four per cent to five to six per cent for 2021. But demand remains strong with multiple frameworks entering the procurement phase.

For 2022, the upgrade to the forecast is less pronounced, but inflation has been predicted to be between three and five per cent. From 2023 the rate of growth in many sectors is expected to ease, as inflation falls back to around three per cent in London and regionally, and five per cent for infrastructure.

Agnieszka Krzyzaniak, the market intelligence lead at Arcadis, said that the continuing high construction output shows no sign of slowing down as recovery continues, and strong new order data suggests that there is still demand, and, as such, prices are unlikely to decrease anytime soon.

She said that while upwards pressure costs can be expected to start easing next year, elevated inflation rates will remain a defining feature of the market for some time yet.

The difference is, Krzyzaniak explained, that it will be mainly driven by rising energy costs and, with the energy used in manufacturing materials translating into around a quarter of total construction costs, the sector is particularly vulnerable to any prolonged price increases.

As well as the impact on construction materials, another area that will be exposed to energy price fluctuations, even if to a lesser degree, will be on-site operations, as from next April, they will be impacted by the removal of the red diesel rebate.

Krzyzaniak said there are several short-term measures that clients can take now to reduce their risk exposure, for instance, cutting the idle and stand-by time of equipment to reduce fuel costs, which also has the added benefits of reducing carbon emissions.

“In the longer term, switching to electric equipment, planning for the adoption of hydrogen and educating plant operatives in managing emissions will not only result in energy cost savings but pave the way for more positive societal impacts too,” she said.

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