Building costs will increase by 17% over the next five years, while tender prices will rise by 19% over the same period, according to the latest BCIS construction forecast data.
New work output, which has been contracting since mid-2023, is expected to grow by 21% over the forecast period.
Dr David Crosthwaite, Chief Economist at BCIS, said: “Industry sentiment data continues to present positive readings, although since the Autumn Budget these are now less optimistic than at the time of our previous forecast in September, when the headline S&P Global UK Construction Purchasing Managers’ Index reached a 29-month high.
“We’re predicting that prices will grow more slowly than input costs in 2025 and that this trend will reverse from 2026.”
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 2.3% in 4Q2024.
On the input costs side, labour remains the main driver, though annual growth in the BCIS Labour Cost Index is expected to have slowed in the final quarter of 2024 to 5.3%.
Increases to employers National Insurance contributions and the National Living Wage will significantly impact labour costs, with a monthly increase of 2.5% forecast in April compared with March. The BCIS Labour Cost Index is forecast to increase overall by 19% up to 4Q2029.
Dr Crosthwaite added: “Given the continuing tightening of the supply side, the long-term loss of employment in the construction labour force, prevailing shortages of skilled labour and an expected uptick in demand this year, the risks to this forecast remain on the upside.”
Materials cost inflation has been moderating since peaking in 2022 and annual growth in the BCIS Materials Cost Index was in negative territory from the third quarter of 2023 to the second quarter of 2024. BCIS expects the index to grow by 15% over the forecast period.
Output figures for 2024 remained disappointing, with the latest quarterly data for 3Q2024 showing a 4.1% decrease in new work compared with 3Q2023.
Dr Crosthwaite said: “We’re expecting new work to have contracted by 4.7% overall in 2024 as a result of declines in most sectors. We’re forecasting a return to growth from 2025, with recovery fuelled by housing and infrastructure spending.
“Although the government’s ambitious targets for housebuilding may remain simply an ambition at the volumes they’re aiming for – to achieve 370,000 homes annually, annual construction output for housing would need to see a 68% increase on 2023 levels – we do expect to see housing output increase.
“However, the state of the public finances puts much public spending at risk and the sluggish economy will likely dampen growth in both industrial and commercial sectors.
“It’s unfortunate that the second phase of the government’s Spending Review has been put back to June as many funding and viability decisions are reliant on a transparent pipeline of work and long-term commitment to a growth strategy.”
