In recent years, inflation has hit the UK construction industry hard. Contractors and subcontractors have faced rising costs across the board – from materials and labour to energy and financing.

An example of rising costs and inflation can be seen in the sale of essential construction materials such as concrete, steel, insulation and timber, which have increased by as much as 60% between 2020 and 2025.

These rising costs don’t just impact current projects and profit margins; they also increase the likelihood of disputes between employers, contractors and subcontractors. In this blog, we’ll explain how inflation affects construction projects, why it often leads to disputes and what parties can do to manage and mitigate the risks.

According to RICS and The New Rules of Measurement 1 (NRM1), inflation refers to a “sustained increase in the general price level of resources.” In construction, this is recognised as an allowance for fluctuations in the cost of labour, plant, equipment and materials from the date of tender through to the mid-point of the construction period.

What causes inflation in construction? There are several overlapping factors that are currently driving up costs, including:

• Material price hikes – Steel, timber, concrete and aggregates have all seen sharp increases.

• Labour shortages – A lack of skilled workers pushes wages higher.

• Energy and fuel costs – Rising energy prices increase plant hire, logistics and transportation costs.

• Supply chain disruption – Delays and shortages inflate procurement costs.

There are still ripple effects from Brexit and COVID, and international tensions, such as the war in Ukraine and Russia, are also contributing to high inflation costs.

All these inflationary drivers are adding to the uncertainty, affecting the UK construction industry and creating friction within the sector in all areas, from project delivery to contract administration.

How inflation impacts construction contracts depends on the type of contract and how risk has been allocated between the parties.

For example:

• Fixed-price lump sum contract: Contractors carry almost all of the risk because once a fixed price is set, it can't be adjusted for rising input costs. The set price at the beginning of the contract can sometimes be significantly lower than the final cost due to inflation, especially if the project has taken years to complete.

• Standard form contracts: Some standard forms of contracts include mechanisms to deal with inflation. For example, the JCT suite provides fluctuation provisions under Options A, B and C, while NEC4 offers Secondary Option X1, which allows adjustments to account for inflationary changes. However, inflation on labour and materials still falls on the contractor.

• Target cost contracts: This type of contract is often used in public procurement and is more collaborative because the client reimburses actual costs plus a fee, but inflation can still erode margins and agreed incentives.

Another way inflation can impact construction contracts is through payment disputes. Many contractors facing increased costs request additional payment from their employer; however, they often resist such claims and argue that the risk lies with the contractor. This tension can lead to cashflow pressures, especially where profit margins are slim.

Extension of time claims and inflation can also pose a significant challenge for contractors. For example, if there’s a shortage of materials or labour, the project may be delayed and the contractor may be unable to complete the works on time with no entitlement to claim an extension of time. Additionally, delays caused by employers resulting in inflationary cost increases due to late procurement of required materials can create additional layers of dispute.

Disputes linked to inflation tend to arise because contracts don’t always deal with the issue clearly. This is amplified because, for many years, the UK operated in a relatively low-inflation environment, and parties became accustomed to overlooking the issue altogether.

Provisions such as JCT’s Options B and C, which allow for adjustments to labour and material costs, were often excluded as unnecessary. As a result, when inflation suddenly spiked, contractors and employers alike found themselves unprepared.

A main reason why inflation leads to disputes is because contracts often provide unclear risk allocation. Excluded or unclear inflation clauses mean the responsibility for rising costs is uncertain. This ambiguity frequently leaves contractors and employers disagreeing over who should pay for the rising inflation costs.

Evidential challenges also create difficulties because demonstrating that additional costs are the direct result of inflation, rather than inefficient procurement or mismanagement, is rarely straightforward. Employers often challenge claims on this basis, while contractors struggle to separate inflationary impact from other project dynamics.

Timing adds another layer of complexity. A claim for additional costs might arise years after the original tender, making comparisons between historic and current prices difficult to accurately assess (especially if records are incomplete or if market benchmarks have shifted).

Cashflow pressure can also lead to disputes. For example, contractors (who often operate on a thin margin) experience the financial strain of inflation, which can lead to cashflow problems, but employers also feel financial burdens and try to protect their budgets – this commonly leads to stand-offs and disputes that can escalate quickly.

There’s no denying that inflation plays a common role in many disputes in construction. However, sometimes the signs aren’t always easy to spot, especially if you are an involved party, so here are a few examples of common disputes that we’ve seen at Novus Resolve.

Example one: Steel price spike mid-project

A common example is when there’s a sharp rise in the cost of a material, for example, steel. A contractor may have fixed a price at tender, only to find that the cost of steel has increased by 30% during construction. Employers often refuse to accept responsibility for the additional cost, leading to claims for loss and expense or, in more severe cases, attempts to terminate the contract.

Example two: Labour shortage leading to wage inflation

Labour shortages commonly cause disputes. Subcontractors facing difficulty in securing skilled workers may demand higher wages, thereby passing on increased costs to the main contractor. The contractor, in turn, may seek to recover these costs from the employer. Disputes then centre on whether wage inflation is a valid ground for recovery under the terms of the contract.

Example three: Delayed project and rising prices

Projects that are delayed and rising prices are also a common dispute in construction. When a project is delayed and the construction period needs to be extended, inflationary price increases may overlap with claims for prolongation costs. This can lead to disagreements between employers and contractors over whether the contractor can recover both delay-related and inflation-driven costs.

You can't control inflation as a contractor or subcontractor; however, what you can do is reduce the risk of disputes. Here are five ways you can manage and mitigate inflation-related disputes:

Clear contract drafting
The most effective approach is to address the issue at the outset through clear contract drafting. For JCT or NEC X1, make sure you include fluctuation provisions to ensure that inflation is accounted for rather than left as a grey area.

Early engagement
Before entering into a contract, you should revisit pricing and consider whether allowances for inflation are realistic, particularly for projects with a long duration. Then communicate with all parties about your contract queries and see if there is an amicable agreement.

Robust records
Once a project is underway, maintaining robust records is crucial, especially if a disagreement or dispute does arise. You need to keep records of material prices, supplier quotations and wage rates throughout the project, as these can all help to prove the cost of every stage.

Collaborative risk sharing
You should also try to take a collaborative risk-sharing approach; agreeing on how the employer and contractor will share the risk can help to reduce any ambiguous clauses. Discuss with all parties how inflationary risk will be shared, as this could ensure you don’t encounter any disputes further down the line.

Contact experts early
The best way to ensure all disputes are managed and mitigated is to engage independent experts, such as cost consultants or dispute resolution specialists, at an early stage. This ensures parties understand their entitlements, assess claims objectively and avoid escalation.

Inflation is reshaping the construction dispute landscape in the UK. Price volatility has become one of the most common triggers for conflict, with contractors, subcontractors and employers often caught in disagreement over who should bear the financial burden.

If you want to avoid disputes during your projects, the best way to protect yourself and your business is through clear contracts, detailed records and proactive risk management. That said, sometimes disagreements and disputes are unavoidable, and when that happens, the best thing you can do is seek expert guidance.

At Novus Resolve, we can help you if you’re facing a dispute. Our team of specialists can clarify entitlements, interpret complex contract clauses and provide support through negotiation, adjudication or other forms of dispute resolution.

Contact us today to discuss how we can help you navigate the challenges of inflation in your construction projects.