INPUT COSTS

Input costs rising, fragile capacity

Despite subdued construction activity in the UK, cost pressures are building across the industry. Material inflation has accelerated, driven by steel tariffs, geopolitical disruption and upcoming carbon regulations. Labour inflation remains relatively muted, but structural workforce shortages persist. Continued weak demand is undermining confidence among material producers, raising concerns that future construction growth could be constrained by reduced manufacturing capacity and skills availability.

From latent pressure to price growth

Several years of subdued construction output has put considerable strain on material production. Manufacturers have faced rising input costs with limited opportunity to pass these on, particularly for heavy, structural materials. In our previous UKMI report, we highlighted that, despite low average increases, material cost pressures had not disappeared; they were simply waiting for the right conditions to emerge. As output grows, material prices are expected to rise.

Data shows that while output growth has not yet returned in a meaningful way in the last six months, material prices are coming under upward pressure. Fuel surcharges, tariffs and geopolitical instability are all influencing material costs, driving the annual change in construction materials prices up to 6.4% in August 2026, according to the Department for Business and Trade (DBT). At the time of our May 2026 UKMI, this movement was less than 3.0%.

Respondents to our sub-contractor survey echoed this perspective, noting that material cost pressures were the strongest driver of inflation in the last year (Figure 8).

Source: Turner & Townsend Subcontractor survey

Steel tariffs reshape the cost landscape

CBAM as an emerging cost factor

The cost of stagnation

This material price movement has been driven primarily by changes in steel prices. In March 2026, the UK government introduced a new steel trade policy to restrict tariff-free steel imports.

From July 2026 onwards, quota volumes (the amount of steel that can be imported without tariffs) have been reduced, and the tariff on steel imports above these quotas has increased from 25.0% to 50.0% on the excess.

These measures, combined with conflict in the Middle East, have increased steel costs, putting greater cost pressure on steel-intensive buildings.

The UK Carbon Border Adjustment Mechanism (CBAM) is scheduled to take effect in January 2027. Its primary purpose is to prevent carbon leakages and safeguard domestic decarbonisation efforts by applying carbon levies on imported goods, mainly steel, aluminium, and cement, according to emissions generated during their production process.

This helps create a level playing field for domestic industries when pursuing decarbonisation efforts. These levies are expected to feed directly into steel prices with impacts varying based on product type, country of origin and production route.

There is a level of uncertainty around the cost impact of CBAM in January 2027 which has led to some caution to accommodate for any changes in pricing.

While construction output has shown modest growth in recent quarters, this has not translated into higher product sales. The latest Builders’ Merchant Building Index recorded a notable 6.6% decline in sales volumes while average prices increased by 5.8% in the year to Q2 2026.

The Mineral Products Association (MPA) has continued to warn that sales of ready-mixed concrete, aggregates and mortar remain significantly below last year’s levels and that the industry’s economic malaise has now persisted into a fifth consecutive year. Once more, the MPA has written to the Chancellor of the Exchequer to stress that plants are being taken out of action and skilled people are being made redundant.

MPA members do not see a clear pipeline of future work, which undermines their confidence to invest, and the strong infrastructure pipeline is not enough to counter the deterioration in housebuilding and the wider private sector.

Without a meaningful and broad-based recovery in output or support for the UK’s material producers, there is a real risk that manufacturing or production capacity could fall short of future requirement. Furthermore, the cost of reinstating capacity will come with its own inertia costs.

Labour

Our May 2026 UKMI report highlighted a softening of the labour market driven by reduced headline output levels, rather than by any meaningful progress in addressing construction’s skills crisis, and this trend has continued throughout the year. Despite a marginal improvement, average wage growth remains well below the long-run average, and below the level of CPI (Figure 9).

Source: ONS

UK construction job vacancies have fallen by 6.0% when compared with the same month a year ago, but are 7.0% higher than at the beginning of 2026, which suggests some confidence is returning to the market and companies are willing to commit to additional resources. Yet, the workforce size remains 10.0% smaller than its pre-pandemic level and 20.0% smaller than its peak in 2008, although the pace of deterioration has slowed recently, shrinking by just 0.5% in the last year.

Overall upward pressure on wages is currently weak, but strong demand in sectors such as industrial and infrastructure may put pressure on already stretched trades. For example, the Joint Industry Board (JIB) national standard rate of pay for electricians has secured a three-year wage deal of 3.95% in 2026, 4.6% in 2027 and 4.85% in 2028, outpacing the average rate of construction wage growth. Similarly to national construction headlines, projects should not assume that headline labour statistics reflect the specific conditions of their projects.

However, structural problems remain. The latest Construction Workforce Outlook by the Construction Industry Training Board (CITB) expects that 41,200 extra workers will be needed per year to 2030 to keep up with CITB’s estimated average output growth of 1.8% per annum.

Positively, major projects and programmes are taking the scale of the skills challenge seriously, with many major schemes incorporating training colleges, apprenticeships and outreach within their scope. The geographic reach of these programmes may necessitate this approach, as further research from the CITB found that construction workers are becoming less mobile and that a transient workforce is becoming a less dependable solution to regional labour shortages. According to the study, in the last 12 months, only 18.0% of UK construction workers have worked between 50 and 100 miles from home, compared with 26.0% in 2015.

"The UK construction sector faces severe labour shortages, supply chain constraints, and rising costs, prompting organisations to seek certainty. Industrialised construction is becoming a fundamental part of the project delivery toolkit, offering organisations greater predictability and a more reliable route from ambition to delivery. By relocating activities into factories, industrialised construction helps to mitigate skill shortages by shifting parts of construction activity into a controlled manufacturing environment and lowering on-site labour demands, improving quality and boosting productivity. While capital costs remain similar, faster construction programmes may reduce financing fees and accelerate revenue generation, while improving viability.

Furthermore, parallel working provides schedule certainty. Component manufacturing occurs alongside site preparation, minimising weather dependency and deadline risks for complex developments"

Dave Clowe, Director and Head of Industrialisation, Real Estate, UK

Selective procurement and persistent pressure in the MEP market

In the current MEP market, procurement strategy is a major determinant of project success. Projects that enter the market with high-quality design information, clear scope definition and balanced risk allocation are significantly better placed to secure contractor engagement and more predictable pricing outcomes.

The MEP market continues to operate under sustained pricing pressures, with forecast inflation expected to outpace general TPI. However, pricing is being influenced by more than input cost inflation. Risk allocation, procurement strategy and supply chain selectiveness are increasingly shaping market outcomes, reinforcing the disconnect between overall construction activity and project-specific cost pressures.

The market remains selective, with greater scrutiny of the commercial and technical risks associated with large, complex packages, especially where design development and contractual obligations are uncertain. As a result, project teams are increasingly de-packaging MEP works to improve market engagement.

Quality of design remains a significant concern (Figure 10). Poorly defined scope, incomplete coordination or seemingly onerous contract conditions negatively affects tender participation and pricing. In an environment where contractors can afford to be selective, projects that lack design certainty or seek to transfer disproportionate levels of risk are likely to experience reduced competition or higher pricing allowances.

Inflation is only one component of cost growth. Regulation, procurement decisions, programme requirements, and supply chain behaviour are increasingly influencing project costs alongside traditional tender price inflation.

Source: Turner & Townsend Subcontractor survey

Secured workload remains uneven across the market and is not necessarily linked to company size, which means that pockets of appetite exist. The increasing fragmentation of project packages has created opportunities for smaller specialist contractors, while some larger firms continue to be selective about the projects they pursue. This variation in order book strength reinforces the need for project-specific market testing rather than relying on broader assessments of construction activity.

Labour availability was not seen as a major constraint, but labour cost inflation was reported as an upward pressure on pricing, with increases to Joint Industry Board (JIB) rates for electrical contracting operatives and apprentices feeding directly into tender returns.

Geopolitical factors continue to add uncertainty to forecasts. Around 40% of companies in our sub-contractor survey reported a moderate to significant impact on costs and pricing arising from the conflict in the Middle East, particularly from copper prices. Although the effects are not being felt uniformly across the market, they are contributing to ongoing supply chain volatility and reinforcing a cautious approach to risk amongst MEP contractors.

"Delivering projects depends as much on market readiness as programme readiness. The UK’s infrastructure investment pipeline continues to expand and major programmes are moving from policy and planning into delivery. Delivering that pipeline will require significant volumes of skilled labour, specialist engineering capability, manufactured products and equipment. The ambition is substantial. The capacity to deliver it is finite.

As competition for skills, specialist capabilities and supply chain capacity intensifies, the organisations that engage early, understand market constraints and create the conditions for investment will be best placed to deliver"