Tender price inflation forecast

Rising tender price inflation allowances threaten to destabilise the construction industry’s momentum in 2022.

The soaring cost inflation that dogged UK construction for much of 2021 eased at the end of the year and into early 2022.

But the Russian invasion of Ukraine in February triggered a chain reaction of events that is now bringing inflation firmly back to the fore of industry thinking.

The initial ripple effects on UK construction are already being felt in several areas with different levels of immediacy:


  1. Higher prices for commodities like metals and energy will filter into construction materials and components, which will push up tender price inflation further
  2. The UK and European construction markets will wrestle with disrupted trade, supply chains, and remittances
  3. Reduced construction confidence and higher investor uncertainty will weigh on asset prices, and tightening financial conditions, together with rising inflation, may restrict construction growth prospects

Energy escalation

In the short term, elevated energy prices are adding significantly to the existing inflationary pressure on project costs. In response to soaring energy prices, construction materials and component prices are increasing, along with site operating costs.

This simultaneous surge in cost comes hot on the heels of a worldwide squeeze on energy supplies.

In March 2022 alone, the monthly indices for crude oil, diesel and premium unleaded increased by 99.4, 33.8 and 30.5 percent on the year respectively. This strong upward trend is seen in Figure 3.

The Department for Business Energy and Industrial Strategy

While alternative oil markets have since opened up and supply has increased, helping prices ease back from their March highs, disruption is set to endure. This is in turn adding to volatility and unpredictability, with a more agile and collaborative approach required to manage these risks.

In many ways, the conflict in Ukraine has exacerbated a series of existing problems in our industry – from fractured supply to low freight availability and port congestion – which have all contributed to price pressures and extended lead-in times for key construction materials and components.

In addition, the UK construction industry was expecting the end of the red diesel tax exemption in April, which will place additional pressures on the contracting supply chain as operating costs increase due to domestic fuel price hikes.

Little surprise then that the Construction Leadership Council (CLC) has confirmed that manufacturers have increased prices by between 5-10 percent as of March this year, with the cost of the most energy-intensive products increasing by up to a fifth.

Materials like bricks, ceramics, cement, plastics and steel which require high amounts of energy to produce are at high risk of further escalation.

Supply chain disruption and resourcing constraints

While increased energy prices are the most direct effect of the Russian invasion on the UK construction sector, there is also concern for the short to medium-term impact the conflict could have on an already strained UK supply chain and existing material shortages.

There is some comfort, however, when looking at the reliance of the UK construction industry on Russian and Ukraine imports. Only 1.2 percent of all imported construction materials in the UK come from both countries, thus, reducing the industry’s direct exposure. Yet, there are items exported from Russia and Ukraine where the UK has a greater level of reliance.

Steel products, timber, asphalt and glass are notable, as highlighted by the Department for Business, Energy and Industrial Strategy, in Figure 4.

The Department for Business Energy and Industrial Strategy

As a result, these materials could now be considered most at risk, both in terms of supply availability and cost inflation.

It is not just direct effects that need to be considered, however. The indirect effects on the European landscape and their supply/demand imbalances are notable as well.

Steelwork is a prominent example. Before the war, the combined output of Russia and Ukraine represented the second largest exporter of finished and semi-finished steel across the world.

Now UK steel buyers are looking to producers in Japan and China to supply their needs, and the greater distance is increasing both prices and lead-in times. With shipping movements impeded by the sanctions imposed on Russia, additional costs and delays may be experienced.

These layered indirect effects have contributed to rising steel costs the UK. On 10th March, British Steel implemented its highest ever price hike with an additional £250 per tonne – an estimated 25 percent jump - on steel sections. Prices have since increased further, totalling a £380 uplift in 2022.

Increased costs and prolonged lead-in times may also affect other materials and components, even if their relative exposure to Russia and Ukraine is low.

Demand reduction

On the flipside, some factors are likely to cool price growth towards the end of the year and into 2023. Supply chains may adapt to the interruptions in supply from Russia and Ukraine, and UK interest rates are set to rise further as the Bank of England seeks to rein in consumer inflation.

This may lead consumers to spend less, which will then feed into lower investment by firms as confidence is strained due to lower activity levels. Higher construction costs might also lead to project deferrals, delays and – over time – cancellations.

This raises the prospect of market softening within the construction sector and a potential easing of tender price growth.

However, unless there is a market contraction, which may still be a possibility, prices typically rise. Over the last 50 years, there have been just six years of deflation. These contractions all followed a UK-wide recession.

Building Cost Information Service, Turner & Townsend

Of course, there are periods where there are quarterly reductions in price growth outside of a recession. However, the likelihood of a yearly fall in tender prices - in the absence of economic retrenchment - is slim.

Additionally, insolvencies are likely to rise as interest rates increase. This may expose the fragility of some players in the UK construction industry, which typically operates on low margins, high risks, and is volume driven.

Trying to accommodate significant inflationary swings, particularly if contracts have been won at lower prices prior to the Ukraine conflict, could be fatal for firms. This may lead to delays, slippage and quality reduction, and cut industry capacity and capability, ultimately restricting its ability to grow.

When coupled with low labour availability, an ageing workforce and rising wages – both at a contracting level and for professional services – this can create some stickiness in pricing even if some heat comes out of the market.

What does this mean for our forecast?

Our central real estate tender price inflation estimate for 2021 has increased by 0.5 percentage points to 6.0 percent. We have also made a significant upward revision to our 2022 forecast, from 4.5 to 8.5 percent for the year.

This is followed by a 0.5 percentage point uplift to the 2023 forecast, increasing from 3.5 percent to 4.0 percent. The forecasts for 2024 and 2025 have been revised down, reducing by 1.5 and 0.5 percentage points to 2.5 and 4.0 percent respectively.

Figure 6:

Tender price inflation: Annual percentage changes

Turner & Townsend

Our forecasts are representative for the UK as a whole and inflation may vary by project size, value, procurement route and region. Projects need to be assessed on an individual basis and may not always align to our central scenarios. For further assistance on cost assurance and inflation analysis in your area, please contact Turner & Townsend.

Turner & Townsend

High energy prices are steadily dialling up inflationary pressure on project costs. Supply chains have also experienced further disruption, with the conflict in the Ukraine and sanctions on Russia adding to demand pressures, low freight availability and port congestion.

In the face of such acute uncertainty, an increasing number of suppliers are not able to fix prices. And in many cases contractors are adding significant risk allowances on projects that are currently being tendered to compensate for market volatility and price fluctuations.

Labour costs are also growing. Construction vacancies are high, employment low, and national insurance contributions have risen.

As a result, our tender inflation forecast for 2022 is now higher than the already high levels of inflation seen in 2021. Prices may peak over the next three months and then see some partial unwinding as the year progresses and markets begin to stabilise.

The latter years of the forecast will be very dependent on how the next 18 months unfold. A market contraction is a possibility, although robust fundamentals do not support falling tender prices at present.

With respect to infrastructure tender prices, our central forecast suggests that 2022 is likely to see an uplift of 2.0 percentage points to 6.0 percent. It demonstrates a more settled view beyond 2022 as risks alleviate, supply chains normalise and oil and gas dependency eases, helped by a swifter transition to renewable energy sources.

Turner & Townsend

There is a stable pipeline committed to by Government, with both the National Infrastructure Pipeline and National Infrastructure Strategy in place to enable longer term, committed programmes. These provide improved transparency about planned and potential future infrastructure projects, increasing certainty for investment decisions, leading to fewer fluctuations in demand and less volatile price movements.

However, energy price rises will be keenly felt in the sector. Red diesel has typically been used extensively by contractors on infrastructure projects, so the changes to rebated fuel entitlement are likely to increase construction costs. And higher crude prices will also impact oil derivatives, including bitumen, which will drive up materials costs for road projects.

While projects with a longer timeframe may be able to continue procuring effectively in the face of extended lead-in times, smaller and shorter projects may be more impacted by the lack of materials availability.

Price pressures are intense but not inevitable

The current market is clearly in an inflationary cycle. Demand in the UK economy as a whole, and construction in particular, has heated up rapidly in the wake of the COVID-19 pandemic.

A resurgence in demand, coupled with several structural market changes, has caused shortages of many materials and components, and increased labour costs – with both issues amplified by Government policy decisions.

These pressures have been compounded by conflict in the Ukraine, pushing up energy prices, distorting people movements and reducing product availability further.

However, while our forecasts have been revised upwards, these inflationary pressures should not be seen as blanket price increases. Many projects and programmes are likely to be affected in different ways, with some materials and components increasing by more than others.

The market is also a delicate one, moving at pace. A keen eye must be kept on risk allowances, where lines may be blurred between separating out risk, actual project constraints and artificial inflationary uplifts.

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