01 / Introduction

When ex-Bank of England economist Andy Haldane forecast in summer 2020 a V-shaped recovery, few commentators predicted how difficult it would be to restart an integrated, just-in-time, global economy. Twelve months on, the challenges become clearer day by day. Not only has McDonalds run out of milkshakes, but the shortage of microprocessors is so acute that UK car manufacturing in July fell by 38% to the smallest volume in 65 years.

Construction clients and contractors are used to operating in an inflationary environment. Over the past 20 years, prices have risen by at least twice the Bank of England’s 2% target rate for 50% of the time. Most of this inflation has been driven by rising demand. Inflation caused by materials inputs is not so common, and the current situation is almost unprecedented. You need to go back to the bad old days of the 1970s to find records of similar, sustained industry-wide materials price increases.

The big problem with disruption to materials markets is the knock-on effects. Increased costs always affect viability, but if contractors are not able to fix their materials prices as part of a bid, then the value of the risk allowance will be much higher too. Shortages, allocations and delivery problems threaten delays as well as price increases. What’s more, even the constant talk about rising costs, shortages and bottlenecks is inflationary – increasing fears and expectations that prices will continue to rise.

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