Five unexpected ways inflation could affect construction

The Office for National Statistics (ONS) revealed last week that consumer price inflation hit 9% in the year to April, while the Bank of England warned that the cost of life is expected to increase further this year.

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

And with the war in Ukraine and the global recovery stuttering from the pandemic, the consultancy arm of entrepreneur Mace warned in March that deal values ​​could increase by more than 5% this year.

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

  1. Inward investment

British land noted this week that he saw investors “moving away from bonds and increasing their allocations to real estate” due to high inflation. The developer said it was well positioned for this trend. Essentially, in times of runaway price increases, most financial assets devalue in the short term. By taking a longer-term view and investing money in projects calculated to generate a healthy return down the line, things start to look more attractive. While this is a nuanced and highly variable picture, there is definite potential for more cash to be invested in commercial construction projects.

  1. Two-level decision making

The rise in construction costs and the compression of household and business budgets are clearly holding back the industry. In just one recent example, development partnership Ambition North Wales said affordability was “the biggest risk” to its £1.1billion portfolio of projects. Meanwhile, analysis by construction knowledge specialist Barbour ABI has revealed that the value of new work awarded to contractors recently hit its lowest level since the summer of 2021. But every cloud has a silver lining and, as As inflation sets in, some relatively cash-rich customers might look to bring in projects, rather than waiting for costs to rise further.

  1. Focus on energy efficiency

With energy bills skyrocketing at an alarming rate, will households and tenants demand buildings with the energy efficiency measures that the climate crisis has so far failed to generalize? Rebecca Larkin, senior economist for the Construction Products Association, believes that properties with higher energy performance certificate ratings could start to attract a premium in the market. “Will energy efficiency work resume in the repair, maintenance and improvement market?” she asks. Likewise, will more customers and end users demand heat pumps, solar panels and natural ventilation in new buildings?

  1. Pay disputes

As sterling signs continue to spin at petrol pumps and supermarket checkouts, workers in the construction industry will feel the pinch as much as anyone else in the country. In a grievance submitted earlier this year to the Construction Industry Joint Council, which sets pay levels for around 500,000 construction workers, the Unite union demanded a 10% pay rise. Dozens of workers rallied to protest a “paltry” offer made in response. Separate protests took place in March as pressure mounted on the contractor behind an energy-from-waste project in Yorkshire to pay workers under the terms of a industry standard work rules. While employers and employees are both squeezed by rising costs, the potential for increased site tension and even industrial action is very present.

  1. Greater cooperation

Unexpectedly, the very clear threat of increased strain on site due to rising costs could actually motivate efforts to prevent this spillover – and ultimately lead to more collaborative behavior. Michael McGrath, Irish Minister for Public Expenditure and Reform introduced this month the inflation cooperation framework for parties to a public works contract. This sets out the approaches and metrics that companies working for the state can use to calculate incremental costs attributable to fluctuating material and fuel prices – with the government meeting up to 70% of agreed incremental costs. Larkin says similar mechanisms could emerge in the UK to boost cooperation and prevent costly conflict caused by inflation.

Alice F. Ponder