To govern is to choose - and the right choice must be to build

Although it is still early days, it is increasingly likely that the effects of the Gulf crisis will be severe, long-lasting and uneven. Even as UK manufacturers and service firms reported an improvement in their prospects in April PMI data, UK consumers have hunkered down, prioritising savings as confidence fell to the lowest level since October 2023.

In its latest monetary policy report, the Bank of England (BoE) has published three scenarios rather than a single forecast. Tellingly, the bank’s central scenario – “persistent disruption” – is based on an assumption that the Strait of Hormuz will remain closed until the end of the year, with inflation rising to between 3.5% and 3.7%, and staying higher for longer.

Construction could be exposed to both the uncertainty and economic headwinds associated with the conflict. Output has already been falling since July last year, and the combination of a sharp hike in the cost of borrowing and the unpredictable nature of the conflict could encourage clients to sit and wait.

Market data is already showing this. The RICS has highlighted a shift in housing markets away from price-sensitive discretionary buyers in its latest residential market survey. Furthermore, the Construction Products Association’s (CPA) latest forecasts feature a sharp downgrade, with housing and housing repair and maintenance expected to see the biggest falls – contracting by 6.4% and 8% respectively.

The CPA focuses on the demand side of the equation. As yet, there is less evidence on the impacts on the supply side of the industry. The Construction Leadership Council’s material supply chain group has recently reported an aggregate 5% increase in material prices, noting that the justification and communication of these increases have lacked detail, which could further undermine the confidence of customers.

Public sector clients must make choices and, in particular, take decisions on in-flight programmes to maintain progress, adjusting budgets if necessary and being flexible on risk

At Arcadis, we have been modelling the potential inflationary impact of the energy price increases seen to date. Our analysis highlights that the effects have gone beyond the cost of materials to affect the cost of haulage, plant, on-site energy and allowances for risk.

Assuming that costs get passed on, our assessment is that, at current energy prices and with the impacts of steel tariffs taken into account, between 3% and 4% could be added to the costs of construction over and above background inflation associated with wage costs and so on.

The question of whether costs can be passed on is crucial to the health of the industry but will also be a function of supply and demand. The CPA’s latest forecast envisages falling workload in most sectors, with only the public sector and the infrastructure sectors maintaining a positive growth trajectory.

Clients in these sectors clearly will play an important role in supporting construction as it faces a challenging future.

We need to spare a thought for the clients and procuring authorities on these projects. Their budgets will be under pressure, and it is foreseeable that contractors might need to review their bid submissions and contractual positions.

Should fluctuations be allowed for, for example, and, if supply chains are disrupted by the conflict, should the contractor be exposed to delay damages? In the face of changed circumstances, decisions might need to be reviewed and new approvals sought, with further implications for delay, disruption and reduced work on site.

The government has promoted its investible pipeline as a key tool to encourage industry to scale up for growth. In current circumstances, the government’s ability to maintain pace on counter-cyclical investment is a key part of its role as “client of choice”.

In a procurement feature last year, Arcadis examined the critical success factors behind strategic public procurement. The factors that we highlighted included the alignment of the client stakeholders with the framework value drivers and the quality of supply chain engagement.

Crucially, we highlighted “framework of choice behaviours”, which include consistency, decisiveness and pragmatism. These qualities will become ever more important if the crisis extends into the autumn and beyond.

The government’s record in supporting the industry through cyclical disruption has been mixed. Immediately after the great financial crisis, capital spending was brought forward to avoid an industry crash. After 2010, however, and as part of wider austerity policies, spending was cut and opportunities to invest using ultra-low interest rates were missed.

With 10-year bond yields hovering at 5%, the government does not have the headroom to intervene widely, but it could be decisive with its own investment, having just commenced the three-year spending review period covering 2026 to 2029.

So, in the midst of the crisis, my call to the government is a deliverable one: public sector clients must make choices and, in particular, take decisions on in-flight programmes to maintain progress, adjusting budgets if necessary and being flexible on risk.

It is often said that, in a crisis, the default is to do nothing in the hope that the crisis passes. In this crisis, the government can and should act to maintain progress.

This is not a call for subsidy or support. Investment is needed and, if inflation does take root, clients will incur some cost. This is a call for collaboration and the sharing of uncertainty by a government that still needs to invest for growth.

Clients and industry can work together to mitigate the impacts of the crisis, but first our political leaders must act. To govern is to choose, and for construction it is to choose to build. And build for growth.

Simon Rawlinson is a partner at Arcadis