2022 – what a strange old year…

Over 2022 the construction industry has been mainly affected by global events, although these have been exacerbated by UK political shenanigans.

Construction materials price inflation peaks at 26%

At the end of 2021 the bank base rate was 0.25% and annual inflation (RPI) was 7.5%. The BCIS indices* showed construction materials costs rising at 19.8% per annum with building costs and tender prices, rising at 10.6% and 4.9% respectively.

Although Covid-19 restrictions were rolling back, the disruption to worldwide supply chains had sparked an unprecedented increase in construction materials price inflation, which peaked at 26% in June.

In February Russia’s invasion of Ukraine led to further pressure on energy prices and commodity prices generally, all of which affected construction materials prices and availability.

Political instability impacts investment climate

In July, after months of ‘Partygate’ revelations, Boris Johnson resigned as Prime Minister. This was followed by a two-month interregnum while the Conservative Party elected Liz Truss, who with her Chancellor Kwasi Kwarteng delivered an emergency mini-budget. Within this, he announced the biggest tax cuts in the UK since 1972 – as these were largely unfunded, the markets reacted unfavourably and sterling fell sharply against most currencies reaching an all-time low against the dollar.

The International Monetary Fund stepped in to make an unprecedented criticism of UK fiscal policy and urged the government to re-evaluate the mini-budget. In October, Jeremy Hunt took over as Chancellor and reversed most of the introduced measures, which brought some level of stability to the markets. By the end of October Liz Truss was gone and Rishi Sunak became Prime Minister.

With the economy falling into recession newly-appointed Chancellor Jeremy Hunt had a real balancing act to perform in the Autumn statement in November. The proposed increases in taxation, both personal and corporate, combined with the rising interest rates will have a negative impact on the investment climate. As a result, potential projects could be stalled or postponed in the private sector – with housebuilders already scaling back investment, the housing sector looks likely to be worst hit.

New regulations to contend with

The extremities of weather in the UK disrupted site working but also concentrated attention on the pressing issue of climate change, with changing regulation and new solutions creating fresh challenges for the industry. For example, from June, new homes in England had to produce approximately 30% less CO₂ compared to the previous standards. Housebuilders participating in the BCIS Private Housing Construction Price Index Survey estimated the cost of meeting the new regulations would add 7.2% to the cost of building a house.

As the cost of living rose, the problem of availability and cost of materials, were replaced by problems of availability and cost of labour – the Hays/BCIS Site Wages Cost index showed annual inflation in site wages at 12.8% in 3Q2022.

Major projects set to continue

On the bright side, a continued commitment to capital investment as a lever for growth and the announcement to continue with major programmes and projects – such as the New Hospital Programme, HS2, and Sizewell C – are likely to help shore up construction spending. However, inflation my well eat into these budgets over time. With the economy shrinking and increasing costs, output from the commercial and industrial sector is likely to fall.

Growth in demand for BCIS Price Adjustment Formulae Indices

Through all this the construction industry has proved resilient and has had a relatively good year. New work grew throughout the year, which meant most contractors had full order books. The industry found methods, both contractual and managerial to deal with price uncertainty. We saw a growth in demand for the BCIS Price Adjustment Formulae Indices, to help implement inflation adjustment in contracts.

For BCIS, 2022 was a significant year as we became on independent company, BCIS ltd, in April. We started a series of webinars, began the roll out of a new website and, by December, the number of project analyses available online topped 21,000.

At the end of the year the bank base rate was 3.5% and inflation (RPI) was 12.8%. Despite this construction new work output grew by 5.7% and materials cost annual inflation fell to 12%. Building costs inflation dipped to 9.7% and tender price inflation rose to 7.6%.

There is an old soviet era saying that it has been an average year – worse than last year but not as bad as next year – let us hope this was not true of 2022.

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*BCIS Materials Cost Index, BCIS General Building Cost Index, BCIS Tender Price Index