Higher levels of construction inflation expected in coming years – report
Design and engineering consultancy Arcadis has forecasted higher levels of construction inflation from 2026 onwards even as construction’s recovery struggles to take-off in 2024 and 2025.
According to Arcadis’ latest Summer Market View report, this is due to resource constraints and the impact of delayed procurements on the future shape of the supply chain.
The report also highlights a 'K'-shaped inflation trend in infrastructure, with varying levels of escalation across different sectors.
Construction material prices are also on the rise after a period of decline, signalling potential shifts in the market.
According to the report, entitled ‘The only way is up’, the mood in the construction sector is showing signs of improvement, triggered by growing signs of confidence in the property sector.
However, significant headwinds are expected to delay the start of a new wave of construction projects.
These include delays affecting residential projects under the new Building Safety regime and the slow progress of commercial and public sector schemes, which are likely to prolong difficult market conditions until mid-2025.
Even though workload continues to shrink, clients are facing capacity constraints.
Many contractors have teams committed to stalled 2-stage procurements, reducing market competitiveness, the report notes.
Delays to project starts are creating a holding pattern where contractors’ resources are tied up, limiting their ability to pursue new opportunities.
This means that clients will continue to find it difficult to attract their panel of contractors – not because their project is unattractive, but because bidders are already committed to slow-moving opportunities.
As the General Election approaches, the construction sector will look forward to upcoming policy announcements for clarity on growth initiatives and investment priorities.
With a potential focus on pro-growth investments in education, skills development, R&D, public infrastructure, and environmental sustainability, the sector anticipates opportunities to contribute to economic recovery and long-term prosperity.
Simon Rawlinson (pictured), head of strategic research and insight at Arcadis, said: “Political parties promise change during election campaigns, but there are few signs of improvement for the construction supply chain.
“In our Summer 2024 forecast, we expect challenging market conditions to persist.
“We foresee a more inflationary outlook for the recovery phase, especially from 2026 onwards, due to resource constraints.
“Present bottlenecks have various causes, some time-dependent and some market-dependent.
“Growth conditions are unlikely to improve in 2024 as blockers persist. By late 2025, with more projects and potential loss in industry capacity, conditions are set for an inflationary recovery.”
Ian Goodridge, market intelligence lead at Arcadis, added: "Capacity issues caused by projects let on a two-stage basis create a 'holding pattern' where contractors are committed to resourcing uncertain projects.
“This situation leads to a paradox of falling workload and contractors claiming they are too busy, as the new work pipeline remains empty.
“Clients need to engage with potential bidders at an early project stage to avoid the risk of a short bid list."
