Q1 2022

TPI Survey Feedback

Input Costs TPI Survey Feedback Our Forecasts Tender Price Change

Workload

In G&T’s TPI survey, the consensus was that workflows are steady and that tendering opportunities (of varying values) are being released regularly. There is a general feeling of positivity in the market and the pipeline of potential projects appears to be strong. Also noted was an increase in enquiries and feasibility studies being undertaken which will hopefully materialise now that COVID hesitancy has subsided. Projects appear to be moving through feasibility to planning or procurement which is creating more market opportunities. There are also reports of a greater range of opportunities spanning across a wider range of sectors – not just the London office sector.

While some noted that it is harder to get funding in light of risks from material price increases and that some projects are taking longer to get into contract, many clients have capital ready to invest and are committed to bringing new schemes forward. Indeed, foreign investment in UK property assets and their construction has continued at a strong pace. The constraints placed on capital expenditure by clients in certain sectors (eg Higher Education) appear to be lifting and longer-term strategies are being developed by a number of clients. Meanwhile, healthcare spending commitments by the Government are expected to bring new opportunities, as is strong demand in the residential, PRS and senior living sectors.

A steady stream of work is being provided by multiple, large-scale masterplan/regeneration schemes after having stalled since the pandemic struck. Demand for industrial warehousing and logistics facilities, which has shown unprecedented levels of growth over the last two years, is expected to remain strong. Glenigan reports that planning approvals and contract awards for industrial projects will continue to increase in 2022 and big civil engineering projects on the horizon will present a halo of investment opportunities in 2022 and 2023.

There is evidently a sector-dependant, two-speed pattern emerging in terms of construction activity and growth. Clients in certain, demand-hit sectors are less able to pass on increasing construction costs. One sector that is being particularly affected by pandemic-related uncertainty is leisure and hospitality, with respondents noting that new opportunities in this sector have slowed significantly. A collapse in overseas visitors as well as COVID-related regulatory restrictions in operations have damaged business viability for asset owners, delaying the recovery in new starts in this sector. Some clients operating in the wider commercial sector are also reporting that rents in off prime locations are not keeping up with the pace of inflation and that this is starting to hurt appraisals from both a finance and construction cost perspective. Consequently, investors are likely to exercise caution for a number of years, but the pipeline is expected to slowly strengthen.

Market Conditions

2021 was a year of rapid input cost inflation. Heightened uncertainty in the market, particularly in the early part of the year, was accompanied by record rises in material prices. These rises did not initially pass through to tender prices and were to varying degrees absorbed by contractors looking to secure pipeline and turnover. Tender price inflation lagged input cost rises but as the year progressed and order books filled, these higher input prices were increasingly passed along the supply chain and on to clients.

The graph below shows a sharp (11.3%) drop in construction average weekly earnings (AWE) between February and May 2020 but with a nearly equally sharp recovery in the following months. Shortly after AWE began to recover and return to their pre-pandemic levels, the BEIS material price index began to rise rapidly. In the year to November 2021, material prices rose by 22.7% and have evidently been the main driver of construction cost inflation in 2021, but we expect this to change in 2022, with labour costs outpacing material price growth.

2201 Q1 TPI Graphs 2022 Web BEIS All Work

Looking ahead, interest rate rises coupled with high material prices and labour shortages will make some developments less attractive or even unviable. Accordingly, some are suggesting a cooling/ levelling off in market activity will unfold as higher prices choke off demand. Others believe that we’ll see a return to equilibrium and that tender prices will begin to stabilise as certain inflationary pressures (namely commodity and material prices) subside. A calmer market would certainly alleviate uncertainty and instil a greater confidence in clients to press ahead with planned projects.

While the spike in material prices may flatten towards the middle of 2022 and help inflated prices for certain trade packages fall back towards previous levels, the pressure to reach net zero carbon targets will impact construction material costs on some projects, as will higher energy costs in the short-term. The risk of labour cost inflation will also play an increasingly prominent role this year and is expected to be the next key cost driver for tenders. Ongoing procurement of trade packages has seen upward labour cost movements on a quarterly basis and the supply chain is predicting further increases throughout 2022 in order to attract labourers and skilled workers to site.

Due to the recent volatility in pricing, all contractors and subcontractors are very resistant to hold prices firm for any more than ten weeks. With the market still very buoyant and order books relatively strong, contractors are generally unwilling to fix key packages without including significant premiums. Both the current market and economic conditions will continue to drive cost increases throughout 2022. To what extent clients start to scale back their development ambitions and investment plans in response to inflated pricing remains to be seen, but if as expected material supply issues settle down in the next six months, many clients will see this as an opportunity to push ahead despite other prevailing inflationary headwinds coming to the fore.

Strong activity growth has led to overheating in several sub-sectors. Fuller order books and an abundance of opportunities has made it difficult to elicit tender returns from both main and sub-contractors and in some cases, specialist trades are only getting a single return. This is a clear sign that contractors are not chasing work as hard as they were. Contractors’ response time has also worsened but this could be due to delays with getting responses to queries from contractors. Nonetheless, contractors operating in these more active sectors are experiencing less pressure to absorb cost increases which is resulting in less predictable tender returns on some projects.

Supply chain disruption and delays will spill over into 2022, but as major global economies begin to transition from a more restrictive, lockdown-based approach to one of “learning to live” with COVID, supply disruption should become less common and acute. Just as supply chain disruptions began to fade in the latter part of 2021, the impact of Omicron offset some of the related gains for building firms. Rising infections and fresh restrictions caused project delays and dented client demand. In fact, according to IHS Markit’s Construction PMI survey for December 2021, construction firms reported delays to client decision making, contributing to the weakest pace of growth in the sector for three months.

Despite this, Tim Moore, a director at IHS Markit suggested that the worst phase of supplier delivery delays that have plagued the sector in the past year “seems to have passed”, with December's survey noting significant improvements in the availability of construction products and materials. The number of construction firms reporting supplier delays dropped from 47% in November to 34% in December. Fewer shortages of essential raw materials and improved delivery times contributed to the slowest rate of inflation for building supplies for nine months. The respite in construction activity also allowed suppliers to the construction sector to catch up on backlogged work and boost their capacity.