Tender price inflation forecast (TPI)
The UK construction sector faces softening demand, stabilising material costs inflation, rising wage growth, and shifting financial risks as it enters 2025. While sentiment remains mixed, easing material costs and interest rate cuts could provide some support in the months ahead.
Business surveys provide a mixed picture
The February Standard & Poor (S&P) Global Construction Purchasing Managers Index (PMI) fell below the 50-threshold for growth to 44.6, the lowest reading since May 2020, reinforcing this concern and highlighting weak order books and cost inflation, despite low demand. Weak activity in housebuilding and civil engineering work were the main contributors, while a degree of resilience was reported for commercial construction. Weak demand conditions and high borrowing costs were cited as the key drivers of low demand. However, it is likely that some projects are on pause, particularly in infrastructure, until there is greater clarity on the government’s plans. Additionally, the uncertainty generated by the imposition of tariffs and their potential impact on trade may well be adding to decline in sentiment.
Demand for housing has fallen amid turbulent economic conditions, but government announcements about new town developments to help it reach its pre-election target of 1.5 million new homes could potentially stimulate this sector. However, much rests on the Planning and Infrastructure Bill going through Parliament to boost the sector.
The RICS UK Construction Monitor for Q4 2024, on the other hand, suggests a more optimistic sentiment about the quarter from survey respondents. Though there was minimal change for construction in Q4, on balance 12 percent more firms reported an increase in infrastructure work compared to those experiencing a fall. However financial constraints again seem to be the largest challenge.
Material price inflation less volatile, but wage growth increases
Material price inflation has eased, offering some relief to the industry. The Department for Business and Trade, the ‘All Work’ Material Price Index edged down 0.13 percent in the year to December 2024. Key materials, including structural steel, old steel scrap, and imported sawn wood experienced significant quarterly price drops of 3.2 percent, 3.5 percent, and 2.3 percent, respectively.
Although many construction material prices have stabilised or even decreased from their peak in July 2022, some materials, such as paint and certain types of concrete, continue to see price increases.
Energy-intensive materials like cement, steel and ceramics remain susceptible to fluctuations in energy prices.
Source: Department for Business and Trade
Labour shortages continue to pose a significant challenge, with the demand for skilled tradespeople often outstripping supply. The latest RICS survey also highlights a particularly acute shortage of quantity surveyors, though the construction labour market is tight across the board and adding upward pressure to wage growth.
Employment in the industry increased by 1.0 percent in Q3 2024 compared to the previous quarter. However, this modest rise followed four consecutive quarters of falling employee numbers, and employment remains 3.4 percent lower on the year.
Intense competition among employers for qualified staff is steadily driving up wages. In November 2024, average weekly earnings in construction rose by 6.9 percent year-on-year, while real wage growth, adjusted for inflation, stood at 4.2 percent.
Labour costs are set to jump further from April 2025, when the National Living Wage will rise to £12.21 per hour, a 6.7 percent hike. Additionally, from April employers will face higher taxes for each employee as the National Insurance Class 1B rate increases to 15.0 percent.
Unless contractors can pass on these higher labour costs in their tender prices, we can expect further erosion of their already low margins. Thin margins increase the risk of contractor insolvency and hamper project delivery.
Economic conditions remain uncertain, though recent policy adjustments may provide some relief. The cuts made to the Bank of England base rate should support investment and ease borrowing costs. However, the inflationary risks that come with these cuts could eat into margins further as wages creep up.
The increase in employers’ National Insurance Contributions may also increase the risk of contractor insolvencies. Company failures are already ticking up, with the construction sector losing 240 more firms than it gained in 2024 Q4. This is the first time that company ‘deaths’ have exceeded births since Q1 2023.
Insolvencies within the construction sector, particularly among mechanical and electrical (M&E) subcontractors, pose significant risks to project delivery and cost stability. The high demand in sectors like data centres and life sciences, which are particularly M&E-intensive, exacerbates this risk and may create cost pressures in other areas of the construction market.
Recent data indicates a notable increase in construction industry insolvencies. In January 2025, corporate insolvencies in England and Wales reached 1,971, marking an 11 percent increase year-on-year and the highest level for any January in over five years. The construction sector has been particularly affected, with 6,830 businesses experiencing critical financial distress in the last quarter of 2024.
Insolvencies have a major impact across the supply chain. When a supplier goes out of business, the need to source an alternative contractor can cause significant project delays and higher costs.
A Turner & Townsend survey suggests that the UK construction industry faced a tough final quarter of 2024, with several critical issues hindering progress. Severe labour shortages, coupled with intricate legal and contractual hurdles, put contractors under increased cost pressure.
The people problem
The industry’s most pressing issue is the chronic shortage of skilled workers. Construction’s share of the UK labour force is currently at a record low, and the industry has experienced a steady loss of workers for over a decade.
Since the start of the COVID-19 pandemic five years ago, the number of people employed in the industry has shrunk by 10.8 percent. In Q3 2024, employment was down 3.4 percent compared to the same period in 2023.
Source: Office for National Statistics
Post-pandemic, job vacancies surged due to increased construction demand, while employment numbers declined. Post-Brexit border closures, early retirement and workers switching to different industries following pandemic-instigated lifestyle changes are also having an impact. While construction demand has softened since 2023, vacancy numbers are still above their pre-Covid levels, as firms struggle to replace workers leaving the sector.
Demographic factors indicate that these labour force losses have not only caused a short-term reduction in capacity but are also creating long-term challenges. Following Brexit and the pandemic, thousands of younger workers from EU countries left the UK, resulting in an increase in the average age of the remaining workforce.
Research by the Construction Industry Training Board (CITB) estimates that the average age of a UK construction worker is now over 50. While numbers are low now, they could drop even further as this large group of older workers approaches retirement age.
Yet the strong pipeline of work requires the workforce to grow, not shrink. The CITB estimates that the UK needs to recruit an additional 251,500 construction workers by 2028 just to meet demand.
Construction’s staffing crisis isn’t new, but its solutions need to be.
Pre-Brexit, recruiting skilled labour from other European countries became a crucial safety valve for contractors unable to source sufficient homegrown talent.
Since Brexit, importing foreign workers has become harder and the days of quick fixes for labour shortages are over.
The construction industry has responded, and several initiatives are underway to replenish the shrinking workforce, with some already yielding dividends.
Begin early
Even though it may take several years for school-leavers to master the necessary professional skills, they are a vital group to target. February’s National Apprenticeship Week provided a valuable opportunity for the industry to showcase the wide range of exciting roles and the digital, environmental and technology skills that a career in construction offers.
Construction’s image still deters too many able recruits, and the narrative should be reset to appeal to a broader talent pool. Above all, the industry needs to demonstrate that it provides rewarding careers, social value, and the chance to deliver tangible benefits for society that few jobs can match.
Invest to save
In the short-term, raising salaries to attract recruits may be unavoidable. However, teaching future-proof skills to those who join now will make them more productive and valuable. Just as digital technology has made professional services teams vastly more collaborative and efficient, the increased adoption of modern methods of construction (MMC) gives today’s recruits the potential to build more, more consistently and more precisely in a controlled off-site environment.
Retention matters as much as recruitment
“The most well-crafted recruitment strategy can fail without effective retention. Securing talent is just the beginning; the real challenge lies in nurturing an environment where employees feel appreciated and can see a clear career path.
The most successful teams are not only formed by hiring the right individuals but by ensuring they remain engaged, supported, and have opportunities for growth.
A robust retention plan acknowledges that career development, inclusivity, psychological safety, and recognition are crucial for performance and sustained success. Organisations that include people from diverse backgrounds typically perform better than those that don’t, especially if they foster a diversity of skills and thought, not just talent.”
Katie Harrison Associate Director, Energy and Natural Resources at Turner & Townsend
Don’t let skills go to waste
The Growth and Skills Levy, the successor to the Apprenticeship Levy, is providing ways for soon to retire tradespeople to transfer their skills to the next generation. One approach could be to incentivise experienced, older workers who are considering retirement to make a phased transition out of work by training apprentices for a few days a week. Another is upskilling between sectors, such as Network Rail’s ‘conversion’ courses to help bricklayers with a residential building background transition into the rail sector.
Matching the pipeline of work to a programmatic approach
The launch of the National Infrastructure and Service Transformation Authority (NISTA) in April 2025 will be one of a series of measures aimed at improving infrastructure delivery in the UK.
NISTA will unify infrastructure strategy and delivery under one cohesive framework. This will be followed in the summer by a 10-year National Infrastructure Strategy. The Planning and Infrastructure Bill, introduced in March, is designed to reduce red tape and simplify the consenting process, giving developers greater certainty.
Together, these initiatives aim to encourage investment by creating a more predictable and supportive environment for infrastructure development.
Coupled with the strong pipeline of infrastructure projects, these initiatives also offer an opportunity to provide a steady flow of work that will help the sector retain key skills. Previously a ‘stop-start’ order flow meant that infrastructure contractors often faced uneven demand, forcing employers to periodically reduce headcount and prompting workers to seek more stable employment elsewhere.
Longer-term certainty will give employers the confidence and the incentive to invest in and train their people.
Clients should also play their part by adopting a programmatic approach in their built asset strategies. The combination of economies of scale with the systematic use of productivity-boosting techniques such as 3D modelling, digital twin technology and MMC enables each worker to achieve more, improving repeatability while driving down unit costs.
These are long-term solutions to improving productivity in construction. Since the outbreak of COVID-19 in 2020, construction sector productivity, measured by output per hour worked, has turned a corner, growing by 11.2 percent - well on the way to reversing the 15.1 percent fall in the two decades to 2019. By contrast, productivity in the whole economy grew by 23.3 percent in 2019 but has fallen by 0.5 percent since 2020.
Sustainability is also of keen interest to new entrants to the job market, and construction must demonstrate the huge strides made in this area and vital role the sector is playing on the road to net zero. Productivity is at its core about people, and our industry’s future success rests on how we attract more of the next generation of apprentices, graduates, and fresh thinkers.
With so many major programmes planned across both infrastructure and real estate, industry collaboration will be vital to avoid recruitment ‘clashes’. Having two separate programmes competing for the same finite pool of workers at the same time would be counterproductive, and decision-makers should be mindful of their peers’ schedules when planning.
The numerous programmes on the horizon, both public and private, represent both an opportunity and a challenge for UK construction. Failure to address the long-term staffing crisis will jeopardise the opportunity and may make the challenge insurmountable.
The industry must work together and proactively to recruit, retain, and retrain the skilled people it needs to play the pivotal role expected of it in the UK’s economic growth.
What does this mean for our TPI forecast?
The UK construction industry is experiencing renewed uncertainty as we wait for government announcements that will directly impact the sector. The Planning and Infrastructure Bill was introduced in March 2025 and in June the Chancellor of the Exchequer will present her Spending Review. At around the same time we also expect to see the government’s Infrastructure Strategy review, which will directly impact UK construction.
With construction material costs still more than a third above their pre-Covid level, labour shortages and high levels of insolvency pose a serious threat to what can be achieved.
This threat comes against a backdrop of economic uncertainty, from the future path of interest rates to the danger of global tariffs and the open question of whether higher NICs can be passed on into higher tender prices.
As a result, our real estate and infrastructure TPI forecasts remain unchanged from the last review until we have a clearer picture.
Figure 7:
Tender price inflation: annual percentage changes
Source: Turner & Townsend survey
Our forecasts are representative for the UK as a whole and inflation may vary by project size, value, procurement route and region. Projects need to be assessed on an individual basis and may not always align to our central scenarios. For further assistance on cost assurance and inflation analysis in your area, please contact Turner & Townsend.
Our real estate TPI remains at 3.0 percent for 2024 and 2025, followed by increases over the forecast horizon as lower interest rates boost growth in both the economy and construction demand.
Regarding our infrastructure TPI forecast. We expect inflation rates to remain at 4.5 percent for 2024, increasing to 5.0 percent over the forecast horizon to 2028.
