Building costs will increase by 15% over the next five years, while tender
prices will rise by 20% over the same period, according to the latest
construction forecast data from BCIS.
As cost inflation moderates and market activity is expected to increase,
tender prices are anticipated to rise faster than costs next year.
The BCIS All-in Tender Price Index, which measures the trend of contractors’
pricing levels in accepted tenders, i.e. the cost to client at commit to build,
saw annual growth of 2.1% in 3Q2024.
Dr David Crosthwaite, Chief Economist at BCIS, said: "The BCIS TPI panel has reported that contractors
remain risk-averse and selective about the projects they bid on, but there has
been more positivity around the project pipeline: 69% of panellists reported
their anticipated pipeline of projects going to tender within the next 12
months increased slightly in the third quarter."
On the input costs side, labour remains the main driver, though annual
growth in the BCIS Labour Cost Index is forecast to slow, increasing overall by
16% between 3Q2024 and 3Q2029.
Materials cost inflation has been moderating since peaking in 2022 and
annual growth in the BCIS Materials Cost Index has been in negative territory
in recent quarters. BCIS expects the index to grow by 15% over the forecast
period.
Dr Crosthwaite added: "The upside risk
to labour costs is that wages are driven up by widely reported skills
shortages, which could impact on the viability and affordability of projects.
The workforce is 88% what it was before the pandemic, when there were already
long-standing concerns about fulfilling skill requirements.
"Insolvencies in the supply chain
represent an ongoing source of concern for the sector, in terms of both
capacity and impact on cash flow. The effects of ISG going into administration
will no doubt be felt throughout the supply chain. The consequences when a main
contractor becomes insolvent are that sub-contractors and suppliers are left
unpaid, which will likely result in further business failures"
Total new work output is forecast to grow by 24% over the forecast period.
Dr Crosthwaite said: £We’re expecting
new work to contract by 4.9% overall in 2024, and for it to return to growth
thereafter. There have been significant declines in the largest sub-sector by
volume, private housing, which has seen a 24% fall in output since the peak at
the end of 2022.
"From 2025 onwards, we are forecasting
rapid growth in housing as pent-up demand is likely to feed through to house
price growth, hopefully encouraging developers to start building again.
Further, the recent modest base rate cut is likely to improve affordability, as
home buyers adapt to what looks like being the new normal and interest rates
settle at around the long-term trend of between 4% and 5%.
"Although some uncertainty was resolved
with the outcome of the General Election, bringing a degree of stability, so
much is now dependent on what is actually going to be in the Autumn Budget.
We’ve heard lots from Labour about its plans. Its slogan to ‘get Britain
building again’ is promising for the sector, but we’re still lacking detail
around many aspects, from its housing plan to public sector funding and major
project reviews."
BCIS produces five-year construction industry forecasts, covering projected
costs, tender prices and output, and examining the latest construction market
trends.
The quarterly BCIS building briefing presents a view of housing,
infrastructure, public non-housing, private industrial and private commercial
new work output against the backdrop of materials and labour costs, and the
wider economic background and market conditions.
