Input Costs

Key Inflationary Drivers

With employment costs, compliance fees and supply-chain constraints all on the rise, contractors continue to face significant inflationary pressure. Counter-vailing forces—such as weaker GDP growth projections, planning and procurement delays limiting active tenders, and moderation in certain material costs—are tempering inflationary pressure. The table below summarises these inflationary drivers alongside the key deflationary factors that are helping to offset them.

MATERIALS TRENDS

The DBT has suspended publication of its material price data pending a full methodological review, with no official figures released beyond January 2025.^[1] In the interim, BCIS has stepped in with provisional estimates, using its own modelling techniques to replicate the DBT indices. The All-Work Construction Material Prices Index fell by 0.7% in the year to January 2025 and now sits 6.7% below its July 2022 peak. Nevertheless, prices remain elevated—still 36.8% higher than in January 2020, before the pandemic-triggered surge. BCIS’s preliminary forecasts for February and March point to a modest rebound in prices.

One possible contributor to this projected uptick is precautionary procurement. Some buyers appear to have brought forward orders or built up inventories in response to US tariff escalations—an effort to hedge against renewed price volatility and supply disruption. At the same time, a short-lived spike in UK and European gas prices during Q1 2025 exerted upward cost pressure on energy-intensive materials via fuel-linked surcharges.

Steel, in particular, has seen renewed pricing pressure—partly due to elevated risk premiums linked to British Steel’s financial stability earlier in the year. Market concerns around potential domestic capacity cuts, especially in long steel products such as rebar and structural sections, further unsettled sentiment until emergency government intervention helped to stabilise operations.

According to the Construction Leadership Council’s (CLC) Material Supply Chain Group (April 2025 statement), the UK construction materials supply chain remains broadly stable. However, regional tight spots persist for aircrete blocks, insulation and several timber lines—notably CLS, carcassing and battens. Price increases announced in Q1 have largely been implemented, typically ranging from 3–7%, though specific items such as PIR insulation have seen hikes of up to 10%.

The CLC noted there is currently no sign of a surge in Chinese steel inflows into the UK. Structural barriers remain: most Chinese steel is rolled to US dimensions and specifications, which are incompatible with British and European standards. Moreover, the growing focus on embodied-carbon disclosure dampens demand for higher-carbon imports.

A more plausible trade diversion risk stems from other steel-exporting nations such as Turkey, Vietnam and South Korea. These countries are increasingly targeting the UK as an alternative outlet for surplus capacity, enabled by:

1. Tariff-free access: These countries are largely exempt from UK anti-dumping measures (unlike China and Russia), giving them greater pricing flexibility
2. Standards alignment: Many producers in these regions manufacture to EN or BS specifications, allowing smoother integration into UK supply chains
3. Excess capacity: With domestic demand softening and US market access tightening, producers are operating with surplus inventory

Any price softening from this redirected supply is likely to be confined to standardised, lower-spec items—such as generic rebar and universal beams—where regulatory and ESG thresholds are less prohibitive. However, UK safeguard mechanisms, including tariff-rate quotas (which cap the volume of steel that can be imported tariff-free from specific countries/regions) and selective anti-dumping duties, will likely moderate both the scale and duration of any deflationary effect.

Across all categories, any price relief from trade diversion is expected to be modest and temporary. Global markets typically self-correct: producers scale back output, surplus is absorbed into other markets, and rising freight costs erode pricing advantages. The CLC has flagged global shipping disruption as a watchpoint. While product availability in the UK remains unaffected for now, some vessels have been diverted or delayed in port. As the CLC notes, the pandemic demonstrated how logistical friction can quickly translate into delivery delays and cost escalation if allowed to persist.

LABOUR TRENDS

Wage pressures remain entrenched in UK construction, even as some headline indicators suggest a softening labour market. According to the ONS, average weekly earnings (AWE) in construction rose 7.8% year-on-year in the three months to March 2025, reaching £811—more than £100 above the whole-economy average (£711), which rose by 5.5%. Construction pay has now increased by roughly 25% since early 2020, outpacing broader earnings growth and maintaining a steep upward trajectory.

Notably, this acceleration in pay has persisted even as job openings fall. The number of advertised construction roles dropped by approximately 27% during the February–April 2025 period, compared to the previous three months (November–January), according to the ONS. While some of this drop reflects wider economic uncertainty and delayed project starts, it has not yet translated into wage softening—suggesting that pay pressures are being driven more by chronic skills gaps than by short-term fluctuations in demand.

The Construction Products Association (CPA) estimates that up to 25% of the construction workforce—around half a million people—could retire over the next 10 to 15 years. In response, the government has pledged to bring 60,000 new skilled entrants into the sector by 2029 via Technical Excellence Centres and industry-led training initiatives. While welcome, this is unlikely to bridge the projected skills gap alone.

The S&P Global UK Construction PMI for April 2025 reported a fourth consecutive monthly decline in employment, largely driven by the non-replacement of departing staff and sustained pay pressures that continue to limit hiring flexibility. Employers are contending with additional cost burdens from the 7% rise in the national minimum wage and higher employer National Insurance contributions, both of which are compressing operating margins. While some firms have paused recruitment or imposed hiring freezes, demand for skilled trades remains robust—ensuring that labour continues to act as a cost escalator, even as broader market conditions soften.

ON-COSTS

Over the past three months, Main Contractor Overheads and Profit (OH&P) levels have remained broadly stable, with most contractors holding margins flat amid sustained competitive pressure. This is supported by our survey findings, where nearly 80% of respondents across all project values reported no change. However, this apparent stability conceals growing strain: rising input costs, weaker pipelines and escalating delivery risks are putting downward pressure on profitability—even where OH&P percentages remain unchanged.

In contrast, preliminaries are experiencing a higher degree of upward pressure. Key drivers include the April 2025 National Insurance increase, persistent labour shortages, and heightened programme risk. Prelims are increasing most on labour-intensive projects and are often used more flexibly than OH&P to absorb rising costs, given the latter’s greater visibility and sensitivity in tender evaluations.

This dynamic is expected to continue. Around 75% of respondents expect OH&P to remain flat over the next 12 months, while 20% foresee increases and just 5% predict reductions. Some noted that contractors may adjust OH&P modestly downwards to stay competitive amid rising labour costs.

By contrast, the outlook for preliminaries is more inflationary. 44% of respondents expect increases over the next 12 months, driven by continued wage pressures, programme risk, and slower client decision-making. Only 1% anticipate reductions. Labour shortages and delivery challenges are likely to prompt further uplifts—particularly on projects vulnerable to timeline slippage or supply chain disruption.

_{[1] In February 2025, the Office for National Statistics (ONS) identified methodological flaws in its Producer Price Index (PPI)—the statistical backbone for all Department for Business and Trade (DBT) construction material price indices, including the All-Work composite index and individual sub-indices. As a result, DBT suspended publication of material price data pending a full methodological review, with no official figures released beyond January 2025.}