Recently the governor of the Bank of England claimed that his ex-chief economist’s view that inflation may reach 4% was alarmist and that we should not overreact to rising prices. Overreacting is one thing, but making sensible provision is another. In construction, fluctuations in labour and materials prices can, and do, quickly erode contractors’ margins. Price inflation has been benign in recent years, which has led to those entering building contracts giving less consideration to its impact and to the need to incorporate fluctuation provisions in their contracts.

Inflation since 1992 has exceeded 5% on only one occasion, so perhaps that is not surprising. However, during the previous 20 years it was seldom below 5% and reached a peak of over 24%. Maybe that is history, never to be repeated; maybe not. The problem is we do not know.

What we do know is that in the past few months there has been rising concern about inflation because of monetary policy both here and abroad. Furthermore, inflation can be exacerbated by shortages, both of materials and labour, which can also lead to project delay. I would not wish to make any prediction about future inflation rates, except to say the risk of inflation has increased, and it would be prudent to make provision for it in building contracts. Not just by increasing the tender price by some arbitrary figure – there is now also an increased risk of changes to the types and rates of contractors’ contributions, levy and taxes payable as an employer, because of the need to redress government finances following the cost of the pandemic.

Read more…