The headline news of the third quarter has been the dramatic movement of both the credit and the stock markets. The credit markets led the turmoil as liquidity and confidence collapsed, leading to the failure of many major institutions and the near failure of many others. Credit flows virtually dried up over a three week period in September and October. The combination of bankruptcy of major financial institutions and concerns over the viability of credit markets triggered worldwide selling of stocks, with most major exchanges registering their largest weekly declines ever, eliminating in some cases one quarter of the nominal stock value. As this is written, there are indications that the credit markets are regaining some stability, but it is likely that the financial markets and the broader economy will remain very fragile for some time to come.

For construction, as with the wider economy, the future is uncertain. There is no way of knowing how the construction markets will fare over the next one to two years, and no way of forecasting likely cost trends.

Escalation planning will be very difficult for the next two to three years as escalation becomes more reactive to external factors and thus more unpredictable. The best inflation planning will be risk planning; developing risk management protocols to identify and manage the greatly increased risks related to construction costs inherent in the current market. Escalation risk mitigation strategies should include a careful assessment of the appropriate allocation of risk across the project team as far as possible by contractual clauses addressing such issues as material price volatility, financing risk, prompt retention release, targeted reductions in bonding requirements.