Tender price inflation forecast
Is the construction sector ready to get Britain building again?
Despite recent GDP and construction data indicating continued weakness, the stimulus measures in the Budget and lower Bank Rate are expected to boost growth over the next two years - although a decline is anticipated beyond 2026.
The headline S&P Global UK Construction PMI registered 54.3 in October, down from 57.2 in September but still well above 50, where it has remained for the past year.
Civil engineering was the best-performing sector in the survey, with rising demand across various energy infrastructure projects and commercial work. Housebuilding recorded a marginal decline in October, with respondents citing high borrowing costs and uncertainty ahead of the Autumn Budget as factors constraining demand.
The Royal Institution of Chartered Surveyors (RICS) Q3 UK Construction Monitor also points to a positive outlook, with increased workloads over the next year. The survey highlights infrastructure’s continued resilience, a pick-up in private non-residential construction, and improving confidence in the private residential sector.
However, the survey respondents emphasised a significant skills gap amongst bricklayers, carpenters and plumbers, underscoring the challenge facing the government in its commitment to delivering 1.5 million new homes over the next five years.
Cost pressures slow to ease
The Department of Business and Trade’s (DBT) Material Price Index fell in September on an annual basis by 0.7 percent, the sixteenth successive month of price contraction. Although price inflation has eased considerably from the 2021 and 2022 highs, the measure remains 40 percent above its pre-pandemic level.
The DBT reports contrasting trends in essential materials. In the past year, the price of steel (scrap and structural) has decreased, while the cost of various cements and flexible pipes and fittings have increased substantially.
Keeping input costs in check
Meanwhile, the other big input cost, labour, is proving problematic as the chronic shortage of skilled labour pushes up wages. Since Q2 2022, UK construction employment has fallen by 6.6 percent, and levels are now 11.0 percent lower than before COVID-19.
The Office for National Statistics reports that average weekly earnings for construction workers rose by 6.5 percent in the year to September, up sharply from the annual rate of 5.5 percent recorded in August. Pay awards have been especially high for skilled trades such as plumbers and electricians (up 7.0 percent in 2024) and steelworkers (up 11.3 percent).
Such high wage inflation is putting significant pressure on contractors’ margins. On an individual project basis, contractors now typically make a profit of between 3 percent and 6 percent. Analysis of the larger firms’ financial results reveals that, in some cases, big contractors are making even less.
Margins are set to be squeezed even further from next April when employers will have to pay an additional 1.2 percent in National Insurance contributions for each staff member.
Such thin margins don’t just increase the risk of contractor insolvency, they also hamper project delivery.
In our latest contractor survey, skilled labour shortages were cited as the most pressing challenge they face when delivering projects, surpassing even concerns over rising construction costs.
The labour shortage is also undermining project efficiency, leading to delays, reduced productivity and operational bottlenecks.
While suppliers who are already under contract will have little option but to absorb the extra National Insurance costs, labour cost concerns have come to the fore for those at the procurement stage.
In response, some clients are understandably tempted to ask the supply chain to shoulder the labour cost risk by specifying the use of fixed-price contracts.
However, bids for such contracts will be risk-adjusted (more expensive) and more likely to come from weaker firms at higher insolvency risk than bids for projects offering a more pragmatic apportioning of risk.
To ensure the financial viability of contracts, procurement teams should:
1.
Move away from a narrow focus on lowest-cost bidding, which erodes already thin margins and increases financial vulnerability for contractors.
2.
Highlight the importance of sustainable project margins to support contractor stability and reduce the risk of insolvency.
3.
Consider a two-stage procurement process which sacrifices upfront cost certainty in return for a lower, and more accurate, final cost.
Economic uncertainty and market turbulence caused by high-profile business failures has meant projects are still on pause until the tide turns. Contractors continue to remain selective on the projects they take on, which are more likely to be the less complex ones.
Source: Insolvency Service and Office for National Statistics
A combination of an improving economy and supportive government measures could boost construction demand, further intensifying inflationary pressures, especially as supply-side capacity remains constrained in the short term and is significantly affected by industry insolvencies. Since the pandemic, cost inflation has escalated faster than tender price inflation, putting sustained pressure on margins across the supply chain.
What does this mean for our forecast?
Although the Budget contained several announcements much of the detailed information we need will be released over the coming months. This includes the Planning and Infrastructure Bill, which will be introduced in Parliament next Spring, which should boost demand and possibly TPI.
On the real estate side, delivering 1.5 million new homes across the next five years remains a major challenge. The industry's capacity to meet this ambitious target will depend on several factors. Most of the emphasis is on reforming the planning process, but this is easier said than done. Even if the reforms are implemented, high material costs and skilled labour shortages can still act as bottlenecks.
The success of this initiative hinges on the government's ability to address these issues and ensure the real estate sector has the resources needed to deliver on this large-scale housing strategy.
While confidence continues to improve, the key indicators driving TPI forecasts have not changed materially since the last review. As a result, we have chosen to keep our forecast unchanged from the 2024 Q3 UK market intelligence report.
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.
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.
Source: Turner & Townsend survey
The Budget also included significant infrastructure commitments, particularly in rail and energy. This is in addition to the proposed £96bn capital expenditure in the water sector and Network Rail’s £45.4bn rail improvement plan over the five years to 2029. These are in cash terms and therefore would erode in real terms if inflation picked up.
Further details will be provided in the strategy report next Spring. Therefore, we are maintaining our previous 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.
Source: Turner & Townsend survey
Securing private funding, securing the supply chain
Two big questions were left unanswered by the Budget: how to attract private sector finance alongside public investment in strategic infrastructure, and how an already stretched construction industry should best respond to an inflationary surge in demand.
In her Autumn Budget speech, Chancellor Rachel Reeves confirmed that HS2 will continue to London Euston – and that the station and surrounding area will be redeveloped through a mix of public and private funding.
She has since called on the UK pensions sector to create pension megafunds capable of investing large sums in infrastructure programmes, though this is a competitive global market.
Attracting investment
With plans approved for mass transit programmes in Sheffield, Birmingham and West Yorkshire, delivery authorities will need to attract private investors from both the UK and overseas.
The new National Infrastructure and Service Transformation Authority (NISTA), launching in spring 2025, will be under pressure to provide greater clarity on how the sector can be made more investable as it leads the strategic planning and delivery of major infrastructure programmes.
Infrastructure programme teams can also contribute by exploring new models for public-private partnerships that reduce risk for institutional investors and enable them to generate regular returns earlier.
The regulated asset base (RAB) financing model, pioneered by the water sector, offers a compelling example, having successfully enabled major projects like the Thames Tideway.
Even without a new partnership model, investor risk can be mitigated in other ways. With the Government set to streamline planning rules as part of a new National Planning Policy Framework, infrastructure clients can use the Institution of Civil Engineers’ Project 13 approach to provide greater clarity and certainty on their programmes, right from the outset.
Supply chain strain and support
The collapse of ISG, the UK’s sixth-largest construction company by turnover, in September has severely impacted the supply chain.
This has simultaneously reduced capacity in the supply chain and added further stress on some subcontractors.
For real estate clients, the repercussions are being felt both at the procurement phase, where there is an even smaller pool of tier-one players to choose from and in ongoing projects, where contractors previously owed money by ISG are now at heightened risk of insolvency.
The strain is particularly acute in subsectors with hot tendering conditions, such as data centres. The increased scarcity of tier-one contractors means the traditional design and build model is either not an option or increasingly poor value.
In response, some forward-thinking clients are moving away from traditional, single-source main contracts and experimenting with alternative delivery models that provide more hands-on engagement, visibility and ownership throughout the supply chain.
Dividing the programme into multiple packages requires clients to commit costs progressively but can improve sequencing by allowing some overlap of design, procurement and early construction activities.
The fundamentals of the integrated Project Management Consulting approach
Foster collaboration with the supply chain
Shift from an ‘us versus them’ mindset to view contractors as partners, not just suppliers. Promote incentivisation and equitable risk-sharing that align goals and ensure all parties benefit from project success.
Solidify supply chain management
Monitor emerging risks closely and engage in proactive problem-solving to maintain project momentum and financial health.
Focus on flexible solutions
Use agile delivery models to reduce dependency on large, single contractors, spreading risk more effectively and allowing greater flexibility, control and quick adaptation in the face of market volatility.
Ensure talent is not lost
Where possible, skilled teams from failed contractors should be recruited to maintain expertise and project continuity.
Stand up for stability
Push for systemic change in how the industry approaches procurement and contract management to build a sustainable environment for all stakeholders.
From transactional to together
Further details about the major capital programmes announced in the Budget, and the government’s plans to streamline the planning process, are expected in the coming months.
However, it is already clear that the ambition and challenge of delivering extensive construction projects across both the public and private sectors are immense.
The anticipated surge in demand must be met by a supply chain with limited capacity, a problem that has been exacerbated by the repercussions of ISG’s failure.
Labour cost inflation is already high and will be driven even higher by the increase in employers’ National Insurance contributions in April 2025, forcing contractors to trim their already thin margins.
Delivering amidst both inflationary and insolvency risks, while ensuring long-term stability for UK construction, will require all participants, including clients, contractors and suppliers, to work cohesively towards shared goals.
We should welcome the prospect of greater collaboration between private and public finance to fund flagship projects like HS2’s terminus at London Euston and the vital infrastructure schemes needed to power Britain’s green energy transition.
Given that contractors are the cornerstone of both the Government’s and the private sector’s capital plans, clients and their project teams must move beyond the transactional mindset to better manage inflationary and insolvency threats and the economy for decades to come.
