Inflation impacts on delivering local projects
We at Arup teamed up with the IED to better understand the impacts of cost inflation and supply chain disruptions on projects and programmes (particularly capital projects) managed by economic development teams.
The findings, presented at a recent webinar, provide valuable insights for the sector.
This is something we really care about, as we see the challenges our partners across sectors are facing due to the economic climate in trying to deliver meaningful projects that can support regeneration and economic development. So, we wanted to provide some perspectives on how those impacts can be managed. To glean a broad range of insights, we conducted an IED member survey, supplemented by interviews with IED colleagues as well as taking learnings from our own projects at Arup and listening to clients and partners in delivery.
Towards the end of 2022, when we conducted the research, material cost inflation was at its highest, labour costs were also high and continuing to grow, and this created knock-on challenges of pressures on finances with interest rate rises. We have not seen inflation on this scale in almost four decades, so institutional knowledge and capacity to deal with some of these issues has felt particularly acute when compounded with wider economic market pressures.
Inevitably, the sector has seen these challenges play out in delivering growth and regeneration projects. More than half of IED members responding to our survey reported being extremely or very affected by all three issues: finance, supply chain and inflation. The majority of respondents said that up to 40% of their capital expenditure in the past year had been cancelled or delayed due to inflation and supply chain disruption. In engaging with some of our clients and colleagues we are seeing anywhere in the 20 to 40% range as a common reflection of delayed or cancelled capital spend.
Decision-makers in the sector have to navigate a quickly evolving environment. The survey suggested they are very aware and understand the impacts of inflation, supply chain disruption and finance issues on their operations and projects, but there are still gaps in understanding the full impacts and what to do about them. So, through our research, we also wanted to gauge the key risks that these organisations are most worried about, both now and looking forward.
The largest risk by far we heard from the survey and engagement was affordability – not just affordability of new projects, but also of existing assets and their operations and maintenance. Reputational risk also came up quite a lot, both in failure to deliver and stakeholder engagement. If you have engaged with local communities or undertaken co-design on projects, you risk your reputation for future engagement if you do not take them on the journey, navigating changes to design, delivery timescale, and so on together.
There are also risks around redesign, and whether or not you can still meet the benefits and objectives set out in original business cases, as well as meeting wider targets.
In sum, the impact that we are seeing in local government growth programmes, in particular, and local regeneration programmes is that upwards of 40% of capital investment projects have been put on hold or cancelled in the past year. This creates risk to delivery, reputation and finance. This is a lot to manage for a sector, especially one that is constrained with resources in terms of people and finance.
We also looked at how these impacts can be managed. IED members reported that the most common actions being taken to manage inflation are reducing project costs through changes to design and scope and re-phrasing or delaying projects. Across the sector, we have seen partners seeking additional funding/financing for projects, as well as cancelling projects and reducing sustainability/net zero or social value requirements.
To manage inflation and supply chain disruptions, the sector has been negotiating or renegotiating with contractors, adjusting the project scope or design and delaying or pausing the project where possible. When compounded across projects, we are starting to see some contractors face challenges in programme management, risk management and financial pressures. So, the relationship between risk sharing and delivery between projects and some of our contractors is going to be key.
With all of this going on, we need to think about how we as a sector are adjusting to these challenges by learning and gaining information and insights. By and large, the sector has been using in-house support, calling on internal leadership, finance and programme management teams to manage these issues. Also, reaching out to private sector partners in areas where they might not have a strong skill set, such as niche requirements for refinancing, re-approaching procurement/contracts or redesign.
Thinking about how local teams are employing their skills, there is a wide range that the sector has adapted positively to manage cost inflation – necessity can be the mother of invention. By and large, we have heard a lot of great work being done to increase skills and ways of working around risk management, financial management and leadership to get through some of these challenges. We have seen investment in relationships with funders, financers and investors, as well as specialist consultants, to support delivery.
So, what are the broader lessons for leading and engaging during uncertain times? Some of these lessons are taken from some work we did as a Towns Fund Delivery Partner. As we realised the challenges that cost inflation was going to have, we spoke with towns and experts and came up with four key pieces of advice:
Risk, and not knowing how to do things, can help you reassess new ways forward. I do think we are seeing a lot of invention and changes in ways of working in the sector, and that is being driven by necessity. We need to use our networks of very clever colleagues who are facing similar challenges and lean on them a bit more and learn from them. We also need to consider the wide range of tools we have to respond, and choose the right fit for us. Lastly, be open and proactive around sharing insights, lessons learnt and new ideas, because I think there is a lot we can gain as a sector by doing so.
Zach Wilcox is Associate Director – City Economics at Arup, an organisational partner of the IED.