Tender prices to rise 4% a year amid skills shortage

12 June 2019 | By Neil Gerrard

Construction tender prices are set to increase by 4% a year from 2022 because of long-term labour constraints.

That’s according to consultancy Arcadis, which warned the market continued to “tread water” as delays to Brexit continued and a post-deal “bounce” looked less likely.

Arcadis has held its short-term inflation forecast at 2-3% running up to 2021 as clients adopt a wait-and-see approach to the current political uncertainty.

Its quarterly Market View, which looks at each sector and region to deliver a tender price forecast for clients found that while growth in construction output was flat in 2018, activity remains close to record levels. But ongoing questions around political leadership and a potential election are affecting investment decisions, with business planning impacted by uncertainty and expected to extend well into the last quarter of the year. 

Source: Arcadis (TPI= tax and price index)

Delays in converting pipeline into turnover are adding competitive pressure to the market, although the trend is highly sector specific. Markets such as data centres are particularly busy, while others including offices, industrial and schools are on a “downward curve”. While enough competition currently puts a partial brake on input cost inflation in the short to medium term, an anticipation of tighter labour markets from 2022-23 means costs are predicted to rise by one percentage point per annum, reaching 4% by 2022. 

Meanwhile, Brexit appears to have triggered further employment growth across the UK economy, with businesses preferring to hire people rather than invest in plant and equipment to deliver long-term productivity gains, according to Arcadis.  As a result of skills shortages, earnings growth for construction employees has averaged 4.2% over the past year, up from 2.1% in 2017. Earnings inflation for the self-employed, who make up 41% of the entire construction workforce, could be higher still. Overall in the UK, nearly 100,000 jobs were created in the three months to March 2019.

Simon Rawlinson, head of strategic research and insight at Arcadis, said: “UK construction has a long-established skills and training problem. With skilled EU labour making up 8-10% of the workforce, specialist contractors and employers have been shielded from the necessity of developing and maintaining the skills of their workforce.  However, with the prospect of post-Brexit restrictions on migration, we’re now facing a real crisis in terms of future labour capacity.

“The supply chain will need to look at other options for increasing productivity. Off-site manufacturing currently delivers around 8% of industry output, but with the introduction of a government mandate, this could increase significantly. Adopting new technologies to improve processes will help to eliminate waste and duplication, while a renewed focus on training and re-training – particularly with the introduction of T-levels in 2020 – will further help to support a much-needed flow of talent.”

A copy of the Spring 2019 Market View is available for download here.

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