Q3 2021

Input Costs

Q3 2021 Tpi Dashboard Arrows Input Costs

Unless otherwise indicated, figures for construction material prices show annual growth rates between April 2020 and April 2021.

Key inflationary and deflationary pressures

Based on our observations of the market, survey feedback and our extensive discussions with the supply chain, we have established that a number of inflationary and deflationary pressures are likely to impact tender pricing. While a number of deflationary factors are still at play, they are getting weaker and aren’t substantial enough to offset the inflationary pressures.

2107 Tpi Web Assets Inflationary And Deflationary Pressures

Material Costs

While high material price inflation is generally not expected to become the new normal, prices have indeed surged in recent months. The construction sector is not alone in facing supply shortages and price volatility. This is a global issue caused by a variety of factors, including:

  • Rising commodity prices pushing up the cost of manufacturing certain construction products/materials
  • Border control changes
  • The Suez Canal blockage
  • Booming construction markets in both China and the US which are snapping up the vast majority of global supplies
  • A shortage of hauliers causing logistics issues
  • Difficulty accessing shipping containers pushing shipping costs higher

These factors have all combined to place growing pressure to secure materials but ultimately the bottleneck issues stem from the sharp rebound in demand outstripping supply from disrupted supply chains. Multiple sectors are competing and trying to outbid each other to secure resources as a number of major economies pursue construction-driven recovery plans. The constrained supply chain has been unable to keep up with the released pent-up demand for construction projects and is likely to remain under pressure in the coming months.

Peter Caplehorn, chief executive of the Construction Products Association and co-chair of the Construction Leadership Council’s product availability group, said the sector was facing a “perfect storm” on materials shortages. Material price inflation has been relatively easy to predict in recent years but recent volatility and frequent price updates from suppliers is making it difficult (if not impossible) to predict cost and come up with a fixed price. Many trade contractors are only fixing their prices for 30 days in light of the current price volatility.

A wide range of materials are being affected including steel, timber, plasterboard (including metal fixings), bricks/blocks, concrete/cement and sand. MEP components, which are highly exposed to commodity prices such as copper, are also experiencing upward inflationary pressures, rampant shortages and increased lead-in times. Paints and varnishes, insulation, aluminium cladding, aggregates and roof tiles are also experiencing shortages. Products that are not widely manufactured in the UK or are derived from raw materials sourced from aboard and shipped to the UK appear to be the most affected by supply issues.

The latest ONS material price index data shows some substantial price increases over the three months to April and the cost of many construction products and materials has continued to rise in subsequent months according to separate data sources.

2107 Q3 Tpi Graphs 2021 Tpi Construction Price Material Indicies Grey Text

British Steel, who announced a temporary halting of new orders for structural steel sections in May due to ‘extreme demand’, has now raised prices for structural steel sections eight times since July 2020. Prices are £410/tonne higher than they were one year ago and the rises have corresponded with the recovery of a number of large economies. The driving force has been record iron ore prices pushing up factory gate prices and strong demand for the commodity from China reducing availability. However, demand is set to moderate in the second half of the year and China has also pledged to release stockpiled industrial metals from its reserves to help tackle concerns over shortages and high prices. Despite this, supply is expected to remain squeezed in the short-term.

Steelwork contractors such as Severfield have tried to absorb some of the price rises by reducing their margins in order to win work, but they’ve been unable to fully absorb these shock rises. Contractors are now passing these rises on to clients and are either fixing prices on the day or are rebasing their cost plans to present day to factor in the increases. There is a reduced willingness by contractors to offer extended fixed price periods in the current climate and price risk has become a key feature in tender submissions in recent months. Contractors are also having to be more flexible with their preferred/pre-approved suppliers in order to fulfil their contractual obligations. This is resulting in estimators applying higher risk and contingency premiums to pricing.

The supply and demand imbalance has created a number of immediate pressures on the sector. Fortunately, economists continue to believe that the surge in prices is temporary - the result of an economic reopening shock. When prices are elevated, suppliers have greater incentive to boost capacity and bolster output. That dynamic eventually results in a downward shift in prices. Operations at input producers should also become smoother over time as staff are brought back and standard operating procedures are re-established.


Official data from the ONS shows that in the year to April 2021 average weekly earnings for construction rose by 13.9% on a seasonally adjusted basis. However, this rise is from a very low base with April 2020 being the month in which the Government’s Job Retention Scheme portal went live. Regardless, it’s clear to see in the graph below that average weekly earnings in the construction sector are marginally higher than they were in February 2020 (pre-pandemic) and despite a drop-off in early 2021, earnings are back on their upward trend.

2107 Q3 Tpi Graphs 2021 Average Weekly Earnings Uk Construction

With 166,600 construction workers still on furlough as at 30th April 2021, this will be having an impact on average weekly earnings. However, encouraging new order data and reports from purchasing managers that the rate of job creation was the fastest in nearly seven years in May 2021, strong demand for labour is likely to create the conditions for wage inflation in the medium to long-term. Once material price inflation and supply issues normalise, skilled labour is likely to become the industry’s most scarce resource.

Early on in the pandemic, there was an expectation of a downturn in the construction sector and some contractors were making redundancies due to their weaker order books. However, the rapid recovery has wrong-footed some contractors who are now having to rapidly recruit labour to meet demand. The “Build-back-better” and “levelling up” agendas will help sustain demand for labour but the significant planned public expenditure may put further upward pressure on labour costs.

The Construction Industry Training Board‘s (CITB) Construction Skills Network recently said that an extra 217,000 construction workers will be needed by 2025 to keep up with demand. This amounts to an additional 54,000 workers a year or an annual average recruitment requirement of 4.4% a year – far more than the current prediction of an annual growth rate of just 1% over the same period. This demand is largely being driven by big planned infrastructure projects such as HS2 as well as Government targets to build thousands of new private homes. However, meeting this recruitment requirement will be difficult, especially with limited access to skilled EU labour. Skilled labour shortages in the UK construction have long-pre-dated Brexit and indeed the pandemic. Neither have particularly helped the situation but some suggest that recent events may be the kick that construction needs to increase productivity levels by adopting more digital solutions and practices.

With construction vacancies hitting a 20-year high (35,000 in the period between March-May 2021), demand for skilled workers is evidently outpacing supply. Interestingly though, employment levels in the sector have been on a general downward trend since Q1 2019 and there is a widening gap between employment levels and vacancies. This suggests that there is currently a strong demand for labour which cannot be met. This is perhaps a result of a portion of European labour returning home during the pandemic and the new Brexit immigration rules restricting supply. In the short-term, UK construction will have a small pool of redundant or furloughed workers to draw on but once exhausted, unless labour supply improves (or productivity levels increase), we’re likely to see higher wage-led inflation in the medium-term.

2107 Q3 Tpi Graphs 2021 Vacancies In Uk Construction


OH&P and Preliminaries

TPI survey respondents reported that overheads and profits (OH&P) from main contractors have largely remained unchanged over the past three months (with more than 77% reporting no change). However, a growing proportion (around 19%) reported that OH&P levels had risen over the last three months (compared to 7% in our Q2 TPI survey). Being in a better financial position generally, tier one contractors have perhaps been in a better position than smaller contractors to increase their OH&P levels as new work volumes have recovered. Contractors applying higher risk premiums to tenders may also account for a portion of the reported rise in OH&P levels among some contractors. Contractor margins have been tightened throughout the pandemic in a bid to win work and secure turnover and so the recent material price inflationary rises are largely being passed on by contractors rather than being absorbed by reducing already lean margins.

Looking ahead, an increasing proportion of our TPI survey respondents expect OH&P levels to rise over the next 12 months. Nearly 43% believe that OH&P will increase (previously 32% in our Q2 2021 TPI survey). The majority (around 55%) believe that OH&P levels will remain flat over the next year as the market remains competitive in many sectors and contractors actively seek to fill their order books. Some also noted that contractors will want to maintain OH&P levels in order to maximise their tender conversion/win rate.

Main contractor preliminaries costs have also remained unchanged over the past three months. Again, more than 72% of survey respondents reported no change preliminaries costs but a quarter of respondents, however, did report rising preliminaries costs (up from 18% in our Q2 2021 TPI). Shortages of scaffolding cranes, high demand for site welfare facilities as new orders recover and also skilled labour shortages increasing staffing/operative rates are all reportedly pushing preliminaries costs higher. Most expect these issues to lessen and smooth out over the medium-term but these, as well as general inflationary pressures the economy is experiencing, are putting some upward pressure on preliminaries. Again, we’re seeing something of a two tier market with tier one contractors trying to remain competitive with their direct preliminaries costs while letting the supply chain take the heat of preliminaries cost increases. Lower tier contractors are more actively chasing opportunities and so are more willing to absorb some of these cost increases.

Procurement Route

Two-stage procurement has become more prevalent over the past three months. As contractors become more concerned about fixing price, there has been a move away from single stage (despite it tending to result in a lower contract price). Contractors’ appetite for risk has hardened in light of the current material and labour shortages with more pushing for two-stage procurement in order to protect themselves from trade package increases.

This shift towards two-stage procurement has happened as the market has become busier and the availability of contractors has become more constrained. Contractors find two-stage appealing as they invariably get a foot in the door and benefit from a less competitive environment for main contract award. With the supply chain less willing to issue fixed prices in the current inflationary environment, two-stage procurement provides contractors with reduced levels or risk. However, clients are also increasingly seeing the benefits of two-stage procurement. Two-stage enables early market engagement with the supply chain to help refine the design and assess the buildability of the project (something of particular importance in the current market). In turn, this provides a greater level of cost certainty. Clients are also conscious that with the unprecedented inflationary pressures, contractors may not be willing or able to adhere to the guaranteed maximum price (GMP) in single stage construction contracts and will want to avoid potential disputes.

With many contractors too busy to tender, negotiation is also becoming an increasingly feasible (and common) procurement route. Some contractor’s pre-construction teams are lean, operating with fewer employees since making pandemic-related redundancies. On the right project with the right client and established relationships, a negotiated procurement route with the contractor coming on board early can produce a positive outcome if set parameters are agreed from the outset.

*Construction Industry Wage Growth (AWE Total Pay) (year-on-year three month average growth to April 2021)