TENDER PRICE INFLATION FORECAST (TPI)
Supply-side policies to boost growth
Against the unpredictable economic backdrop, built asset investors remain cautious. Meanwhile, the government’s mooted plan to tighten the rules for skilled work visas raises the prospect of construction labour shortages and project delays.
Planning reforms and the government’s industrial, infrastructure and housing strategies are expected to stimulate demand, as should lower interest rates. However, elevated construction costs and insolvency risk, coupled with the delays in utility connections examined below, continue to pose major challenges.
As part of its economic growth strategy, the government has made housing a key priority by committing to deliver 1.5m new homes in England by 2029. The Planning and Infrastructure Bill aims to accelerate growth through a set of supply-side reforms designed to achieve the housing target and enable infrastructure development.
The industrial strategy unveiled in June presents an ambitious plan aimed at advancing the professional and services sector. It details measures to enhance business funding, reduce regulatory burdens and lower energy costs.
Key components of the strategy include an additional investment of £28.6bn on skills, research and development across eight sectors including artificial intelligence and advanced manufacturing.
The 10-year Infrastructure Strategy, also published in June and which will be revised every two years, outlined the government’s long-term infrastructure investment plans. This initiative is backed by a minimum of £725bn in government funding over the next decade, with at least £9bn earmarked for urgent maintenance works in 2025-26.
The Infrastructure Strategy also revealed that infrastructure programmes will increasingly be fuelled by a wider array of funding models, such as the regulated asset base agreements exemplified by Sizewell C and availability-based contracts.
A weak construction outlook
The next decade may yet be a golden age for UK construction and infrastructure. But for now, the picture remains hazy. June’s Standard & Poor (S&P) Global Construction Purchasing Managers Index survey (PMI) recorded the sixth consecutive monthly contraction in output across the construction sector, at 48.8. A reading below 50 indicates contraction in activity, and vice versa.
The survey identified a sharp contraction in the commercial and civil engineering sectors, while housebuilding rebounded from a weak May to become June’s best performer.
Source: S&P Global
Rise in labour costs
April 2025 saw an increase in the NICs paid by employers, from 13.8 percent to 15 percent. In addition, the earnings threshold at which contributions start was reduced from £9,100 to £5,000. These changes mean businesses now face higher costs for each employee.
While all construction firms will see the same change, they will affect packages or elements differently, depending on the labour intensity of the work involved. For instance, internal walls and demolition are more labour-intensive than vertical transportation and façades, which incorporate a significant material component.
Input costs may also be pushed up if UK-based manufacturers of construction materials raise their prices to offset their higher NIC costs.
Based on Turner & Townsend’s modelling, factoring in the increased cost of goods and an uplift to items calculated on the cost of construction, it is estimated that total shell and core construction costs could increase by 1.0 percent.
The impact of these additional costs on existing projects will depend on the procurement route selected, and some may trigger challenges where there is no agreed recovery mechanism. For new contracts, employers’ higher NICs will manifest as immediate price increases, while their knock-on impact on other costs may take several quarters to feed through.
Softening construction labour market?
The S&P survey also revealed that construction headcount continues to fall, with increasing numbers of vacancies remaining unfilled. This was linked to lower demand and contractors’ efforts to reduce overheads to maintain margins.
This could explain the easing of construction wage inflation from an annual rate of 9.5 percent in March to 5.1 percent in April. It is too early to say whether this fall marks the start of a new trend, especially as we expect skills shortages to persist.
Source: Office for National Statistics
The Department for Business and Trade has been unable to publish its ‘All Work’ Material Price Index since January. For 20 months prior to the temporary suspension, the index had been in deflationary territory. Separate data from the Building Cost Information Service (BCIS) suggests that, on an annual basis, material costs grew only modestly in May.
Construction insolvencies fell slightly in April as 324 building firms became insolvent, compared to 376 in March. However, the trend seen since 2021 has been upwards to record levels.
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.
What does this mean for our TPI forecast?
With so many moving parts, it has become even more challenging to produce a TPI forecast. During the second half of 2025, soft demand should keep material price inflation under control. While wage inflation fell sharply in April, one data point alone cannot be confirmation of a new trend. Meanwhile, the increase in employer NICs has already raised labour costs, though their full effect on TPI may not be seen until later this year.
Similarly, the impact of planning reforms will probably not be felt until next year, while the industrial and infrastructure strategies are more long-term.
As the key indicators driving TPI forecasts have not changed materially since the last review, we have chosen to keep our forecast unchanged from our UKMI Q1 2025 report.
Our real estate TPI forecast remains at 3.0 percent for 2025, followed by increases in coming years as lower interest rates and supply-side reforms boost growth in both the economy and construction demand over the medium to longer term.
As for our infrastructure TPI forecast, we expect inflation rates to remain at 4.5 percent for 2025, increasing to 5.0 percent over the forecast horizon to 2028.
By implementing planning reforms and offering greater clarity on its long-term infrastructure strategy, the Government aims to facilitate faster decision making and reduce uncertainty. This would give both private and public partners the confidence to invest and significantly boost the infrastructure sector over the forecast horizon.
As competition among various infrastructure projects intensifies, we can anticipate increased strain on supply chains due to growing demand for scarce skilled workers and key construction materials. This heightened pressure could result in relatively higher cost pressures in the infrastructure sector compared to real estate.
As a result, we predict infrastructure TPI to rise at a faster pace compared to real estate.
Figure 6:
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.
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