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Could cost inflation derail the Midlands Engine?

Cast your mind back to the construction industry’s monthly and quarterly surveys from about this time last year.

‘Uncertainty’ was the buzzword of the day in the run-up to last June’s referendum, with many firms citing it as their chief concern when discussing future workloads.

But fast-forward 12 months and it’s as if we’ve done a simple find-and-replace on the keyboard – swapping out ‘uncertainty’ for ‘cost inflation’.

It’s true that uncertainty does remain, particularly around what Brexit deal the UK will strike with the EU. Yet all the while, costs have been steadily creeping up.

Costly area

The Markit / CIPS Construction PMIs for the first four months of 2017 have so far reported month-on-month cost inflation, with the most recent April survey pointing to sharp increases across the board.

And while the figures vary UK-wide, one particular area cost inflation is hitting hard is the Midlands. Bam Construct’s Midlands regional director Rod Stiles says contractors in the region will have to face up to more sustained inflation in the year ahead.

“But if investors are sitting back and waiting, they are running the risk that contractors will simply go elsewhere”

“We’re seeing inflationary pressures because it’s a buoyant market,” he says. “Whether goods are imported or not, suppliers are looking to increase prices – and it’s that time of the year in Q1 where some suppliers have pushed prices up by as high as 15 per cent.”

He adds that, although he has seen inflationary pressure dissipate over the course of years gone by, this year is proving to be an exception, with inflation sticking around the 5-7 per cent mark.

And while Bam is finding the market buoyant in major offices and education – the firm is on site at the £200m Three Snow Hill office development for Ballymore and a £41m extension to a University of Birmingham’s campus – other pipelines are looking more short term, with developers sitting on their hands until HS2 arrives.

Sitting back and watching

Mr Stiles says tenants have been reluctant to commit to new office buildings, while surveyors in the region have reported their supply chains are only able to predict workloads in the near term, with reduced appetite among contractors to absorb risk within tenders as a result.

“Investors have come in but they’re sitting on their hands waiting until the demand improves,” Mr Stiles admits. “As long as they’re ready for 2023, they can sit back and watch.”

But if investors are sitting back and waiting – whether that’s for cost inflation to slow down or for the market to pick up – they are running the risk that contractors will simply go elsewhere.

With Liverpool and Manchester both booming in office development and PRS in particular, there’s a real feeling that in some sectors skilled trades and office-based staff are looking to the North-west as a reliable source of workload.

Until pipelines are clearer, the Midlands may struggle to keep its people – and that means for developers, sitting on their hands should no longer be an option.

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