Inflation within construction

This article was authored by Morgan Rose, Trainee Solicitor, London.

The construction industry is facing an unprecedented myriad of issues regarding inflation which has caused a log-jam between contractors and employers on costs for new and existing projects.

From materials to labour, the UK’s current construction output, slipping to a nine-month low illustrates the general issue. Despite the government introduction of the energy cap of £2,500 on 1 October 2022 and new business support packages available, there is real potential that inflation could get progressively worse. This is amplified further in light of the mini-budget on 23 September 2022, which has subsequently caused the pound to drop to a record low against the dollar.

It is evident that rising inflation has caused stifled flexibility and uncertainty for construction firms in the current period, which is a dramatic contrast from the UK in 2020, with low inflation and a wide range of suppliers. As such, the industry is trying to find ways to circumvent the coming challenges.

The issues at hand

Prices of materials have leapt from a steady 15% to 110% on projects using standard materials. This is even more extreme on bespoke projects that use specially designed materials. This stark jump in pricing, caused by inflation, dramatically increases contractors’ exposure to liquidation, and puts the employer in a very tricky position, either having a greater risk of the project not being completed, paying out more to save the contractor from liquidation, or having to appoint a new contractor at a much higher rate.

One of the primary causes behind construction material prices being hit by inflation is also a wider issue that all sectors having been tackling - the energy crisis. Despite the aforementioned energy caps and business packages, costs are still dramatically higher than what they were in 2020. A notable example of the energy crisis causing a rise in inflation for material pricing is that of brickwork; with soaring energy prices, the cost of powering machinery to create a brick greatly affects the construction industry as a whole, with prices in brickwork and other materials having a tendency to follow the rise in energy pricing, just so that manufacturers can remain profitable at the same margins.  

It is not just the issue of material costs increasing as a result of inflation, but also that of labour constraints and logistics. Lack of free movement, catalysed by the pandemic, has led to increases in costs as many labourers and contractors are unable to travel as freely as before. This has meant the pool of workers who can transport goods and provide contractors’ services has reduced significantly. Meanwhile, demand has persisted - leading to a spike in costs that is reducing contractors’ capabilities to deliver construction projects to schedule. With contractors and sub-contractors working on fine cost margins through construction phases, this is an unwanted additional pressure that might tip the balance. These price increases mean many projects are no longer cost effective compared to when they were originally contracted prior to COVID-19.

The issue of labour market constraints is also present within the design and management elements of construction projects. As many design and management teams are based internationally, costs are likely to rise as a result of increased demand for skilled management. This combined with general inflation increases, will lead to a dramatic rise in wages for such skilled workers which could cripple the industry. Construction professionals are therefore recommended to pay close attention to the terms of any fixed price contracts in their projects.

The underlying issue for CAR Insurers

Inflation within the construction industry will understandably have a knock-on effect for the insurance industry. Insurers will need to be vigilant in the current market to ensure that policies reflect the needs of those covered. Builders' risk and Construction All Risk policies are negotiated on an estimated contract value, and it is likely that many policies were issued during a steadier period of much lower costs.

As such, contract values may have changed substantially and may now require amendments to their limits and premiums to reflect this turbulent upsurge in costs. These cost increases could also affect insurers’ willingness to issue new policies, and there is potential for a more cautious market overall if uncertainty persists, particularly if there has been difficulty with existing policies and fluctuating contract values.


There are various types of due diligence that can be carried out by project professionals to ensure that procurement is handled effectively in response to the inflation crisis. These include identifying capacity in the supply chain to accept risks, tweaking contract forms or reconsidering the procurement options available.

Another possible way to combat the inflation difficulties could be to move towards target cost contracting at tender, meaning that the contractor will be paid the total cost it incurs plus a fee.

Insurers of new policies will need to work closely with employers and contractors to obtain regular updates, as costing in construction will be more unstable going forward. This can also be applied to existing CAR policies, where insurers should collaborate with their insured to re-evaluate the pricing analysis previously carried out. This will ensure premium and limits under the policy are an accurate reflection of the contract value and it is recommended this analysis is updated frequently against new price changes to ensure that risks are priced and assessed effectively.

Related item: Prefabrication and energy prices – a double-edged sword

Read other items in Construction Brief - October 2022