Input Costs

Key Inflationary Drivers

With post-budget business sentiment taking a hit and some contractors looking to pass on increased employment costs, the balance continues to tip in favour of inflation. The table below outlines the primary cost drivers alongside deflationary factors that are partially offsetting increases.

Materials Trends

The Department of Business and Trade’s (DBT) ‘All-Work’ index – a basket of goods that tracks price movements for construction materials – has fallen 0.7% over the past year (and 6.5% since its peak in July 2022). However, compared to early 2020 levels, before the pandemic, material prices remain approximately 37% higher.

Material price inflation has remained relatively static over the past year. However, price pressures have been more pronounced in materials used for finishing trades (eg drylining) and building services than in shell and core trades. Pricing for MEP items remains elevated, driven by high import costs and persistent demand for specialised components.

Despite these pressures, most materials are readily available, with only a few exceptions—such as fire-rated ductwork, certain electrical equipment (eg LV panels), and mechanical plant (eg air source heat pumps)—where supply remains constrained.

A notable risk factor for material prices in 2025 is tariffs, which could reverberate through global trade networks. The US has imposed a 10% tariff on Chinese imports, prompting China to retaliate with tariffs of 10-15% on a limited range of US products. Even if the UK remains unaffected by direct tariff increases, the indirect effects are likely to be inflationary, as disruptions in the supply of raw materials and finished products drive up costs across global markets. Sectors such as steel, aluminium and timber are particularly vulnerable, given their exposure to international trade. These price increases could filter through to UK contractors, particularly those reliant on imports for essential construction materials.

Last year, the World Bank projected that metal prices would be stable throughout 2025, reflecting only moderate growth of industrial activity in major economies, particularly China. However, the introduction of tariffs or other trade restrictions could spark volatility in the commodities market, potentially disturbing supply chains and affecting price dynamics. Given China’s pivotal role as both a major producer and consumer, global commodity prices will also be heavily influenced by domestic demand conditions.

So far, stimulus measures announced at the end of 2024 have failed to significantly boost Chinese domestic demand, and the rest of the world has not been able to pick up the slack. Iron ore prices, for example, have been trending down and are expected to keep falling this year due to overcapacity in Chinese steel industry. This oversupply, combined with sluggish global demand, could keep downward pressure on industrial metal prices.

Labour Trends

The UK construction industry is experiencing sustained above-trend wage growth, driven by skilled labour shortages and a shift towards more labour-intensive renovation and refurbishment projects, which are constrained by the complexities of working within existing structures. In November 2024, average weekly earnings rose by 7.3% (on an annual, three-month average basis), significantly surpassing the long-term average of 3.1%, though this increase was partly influenced by a lower base period.

Several factors are expected to drive ongoing wage pressures. Increased public sector investment is set to boost demand for a limited labour pool, intensifying competition for skilled workers and pushing wages higher. A potential recovery in housing market activity could also increase construction demand, resulting in greater workloads and subsequent wage growth. Additionally, regulatory changes such as those introduced by the BSA are raising project costs as firms must meet stricter safety standards and more detailed documentation requirements. These compliance burdens are indirectly driving wage pressures, as companies compete to secure the skilled workforce needed to meet new demands.

Following the Autumn Budget, planned increases in employer NICs from April 2025, along with a reduction in the NIC threshold, will raise overall labour costs. Many firms have already begun factoring these higher costs into tenders and contract pricing, anticipating the financial impact. Most are expected to fully pass on, rather than absorb, the added tax burden. G&T's modelling suggests that these changes will result in a 1.25% increase in construction labour costs.

Skills shortages continue to be a significant constraint in the UK construction industry, driving wages higher, particularly in specialist trades such as MEP, cladding and fire safety. The rapid growth of sectors like data centres, gigafactories and energy infrastructure is further intensifying demand for MEP services, contributing to price pressures.

According to our TPI survey, finishing trades – including drylining, joinery and quality finishes – are facing increased price pressure. This is partly driven by the need to assume more design responsibility and risk, especially in areas like drylining and fire stopping. In contrast, earlier shell and core trades are experiencing downward pricing pressure due to increased competition and a slowdown in new project starts.

The recruitment landscape saw a slowdown in the second half of 2024, with PMI surveys indicating that job creation remained below pre-pandemic levels. Elevated cost pressures and lower workloads constrained recruitment plans, as firms sought to reduce overheads and avoid replacing departing staff. ONS data also revealed a dip in advertised vacancies in early autumn, coinciding with a decline in new orders. However, this slowdown may be temporary as firms reassess their long-term expansion plans and upcoming project starts. With industry capacity constrained, demand for specialist labour is expected to grow.

Overall, the construction labour market faces upward wage pressures due to ongoing shortages and sector-specific demand. Regulatory changes, increased public sector investment and market recovery are expected to further drive wage growth. Consequently, firms will need to carefully manage the rising cost of labour and adapt to the evolving recruitment landscape.

On-costs

Our Q1 2025 TPI survey suggests that Overheads and Profit (OH&P) levels have remained stable over the past three months, with 82% of respondents reporting no change from the previous quarter. A shrinking pool of contractors is likely to reduce competition, reinforcing selective bidding strategies to mitigate risk. While OH&P is expected to remain steady overall, some markets—such as residential and build-to-rent (BTR), where demand is weaker—may see slight downward adjustments as contractors look to secure work.

Meanwhile, preliminaries costs continue to rise. In Q4 2024, 44% of survey respondents reported increases across projects of all values, driven by extended Gateway 2 and 3 timeframes, NIC-related labour and staff wage cost pressures and rising insurance and bond costs. However, in a more competitive market, some contractors may limit preliminaries cost increases to maintain a competitive edge.

The impact of these trends is expected to vary by contractor type. Tier 1 contractors are likely to see more pronounced increases in both OH&P and preliminaries, while lower-tier contractors may experience less pressure, leading to a two-speed market. In the public sector, there have been suggestions to guarantee higher margins on large projects to ensure they remain commercially viable and attractive to bidders.