Input Costs

Key Inflationary Drivers

Contractors continue to face inflationary pressure from rising employment costs, Building Safety Act compliance and capacity constraints in parts of the supply chain. However, these are being tempered by subdued demand, stable materials costs and delays in procurement and PCSA conversion—factors that are increasing competition for live tenders. The table below summarises the key inflationary and deflationary forces currently shaping market conditions.

MATERIALS TRENDS

Materials supply conditions appear broadly stable across most product categories, with significantly less pressure than in the labour market. Availability continues to improve, with some noting reductions in lead-in times for major plant and a return to normal supply levels for steel and rebar. This easing is being attributed in part to reduced project activity, which is helping rebalance supply-demand dynamics. While global factors such as US policy or Chinese demand could still introduce volatility, most reported no significant issues in the period. Barring external shocks, materials supply is expected to remain steady in the short term.

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 0.6% in the year to May 2025 and now sits 5.4% below its July 2022 peak. Nevertheless, prices remain elevated—still 38.6% higher than in January 2020, before the pandemic-triggered surge. BCIS’s preliminary forecasts point to a modest (1.4%) rebound in prices since the start of 2025.

The modest rise in prices appears to be driven in part by higher payroll costs in the manufacturing sector—particularly the increase in employer National Insurance Contributions introduced in April—which are now being passed on through the supply chain.

Global tariff uncertainty may have also had a modest indirect impact, as some suppliers may have included contingency allowances in pricing to hedge against potential trade disruptions or cost volatility affecting globally traded materials such as steel and aluminium.

Rates for rebar, mesh, bricks & blocks, concrete, timber, drylining materials (including boards and metal components) and joinery works all have become more competitive according to recently surveyed main contractors. In some cases, wholesalers and manufacturers are holding higher levels of stock or maintaining production above current demand, contributing to modest downward pressure on prices. However, prices for more complex or imported materials—such as specialist cladding systems, aluminium, copper products, lift components and certain MEP-related products—remain firmer. This reflects a combination of longer lead times, exposure to currency fluctuations, and the application of supply chain risk premiums amid ongoing global uncertainty.

With overall stability returning to the market, contractors report no difficulties in securing fixed material prices from the supply chain—an important shift from the volatility of recent years. Most anticipate material cost inflation in the range of +0.1% to 2.5% over the next 12 months, marking a reversion to more typical, manageable rates of increase. That said, several risks remain. Geopolitical tensions could disrupt energy markets, posing a threat to pricing stability for energy-intensive materials and oil-based products such as insulation, plastics and bitumen. Global shipping costs also remain vulnerable to disruption, with potential knock-on effects for imported goods. A modest uptick in construction activity later in the year could apply additional upward pressure on prices, particularly where demand for specific materials temporarily outpaces supply. Overall, however, the pricing environment remains comparatively stable and well-behaved.

LABOUR TRENDS

Labour availability remains a significant constraint across the UK construction sector. Shortages are most acute in MEP and other specialist trades and are particularly evident on major programmes such as large-scale infrastructure and data centre projects, where demand is both skill-specific and concentrated. The latest S&P Global UK Construction PMI shows employment levels declining for a seventh consecutive month in July, driven by lay-offs, recruitment freezes and the non-replacement of leavers. Despite these reductions in headcount, sub-contractor rates continue to rise at one of the sharpest paces in the survey’s history, even as usage declines and availability improves—indicating that the supply of critical skills remains structurally constrained.

Official pay data supports this picture of underlying tightness. ONS figures show that average weekly earnings (AWE) in construction increased by 5.0% year-on-year in the three months to June 2025, reaching £812—£88 higher than the whole-economy average of £724, which rose by 4.6%. Construction pay has now risen by approximately 25% since early 2020, outpacing most other sectors. While there has been a modest moderation from the peak growth rates recorded in 2023–24, wage inflation remains above historical norms and continues to be driven by competition for scarce skills. The Government’s £625 million skills investment programme—aimed at training up to 60,000 additional workers by 2029—will provide some long-term capacity, but is unlikely to materially alter short-term labour market conditions.

Vacancy data indicates a cyclical easing in demand, but this should not be interpreted as evidence that underlying skills shortages have been addressed. Construction vacancies, while still broadly in line with their 10-year average, have fallen sharply over the past year—from more than 50,000 in 2021–22 to fewer than 30,000 in April–June 2025, the lowest level since the immediate post-pandemic rebound in 2020. This decline reflects weaker workloads and slower project starts, rather than a sustainable increase in the availability of skilled labour.

Looking ahead, business confidence has recovered marginally from June’s two-and-a-half-year low but remains well below its long-run average. Structural shortages in specialist trades, coupled with policy and demographic headwinds, indicate that any cyclical easing in labour demand will be short-lived. As market activity recovers, upward pressure on wages and sub-contractor costs is expected to re-emerge, keeping labour availability and cost escalation as central risks to project delivery and tender pricing through 2026.

The CITB’s Workforce Outlook 2025–29 projects the construction workforce will need to expand by approximately 239,000 workers over five years, reaching around 2.75 million by 2029. Nearly half of this increase will be in skilled trades such as carpentry, joinery, plumbing and electrical work, while infrastructure-linked roles—steelworkers, plant mechanics, scaffolders—are expected to see the strongest growth. These projections underscore the scale of sustained, structural expansion required to meet housing targets, infrastructure delivery and the sector’s decarbonisation and digitalisation goals.

ON-COSTS

Over the past three months, Main Contractor Overheads and Profit (OH&P) levels have remained broadly stable, with the majority of contractors holding margins flat despite sustained competitive pressure. This is reflected in our latest survey results, where 88% of respondents reported no change in OH&P percentages across project values. However, emerging nuances are worth noting. Several contractors flagged the use of artificially low OH&P allowances in two-stage tendering, with costs later recouped via inflated package pricing. Others noted a softening in OH&P—particularly in the Tier 2 market—driven by growing pipeline gaps and a more competitive tender environment. Tier 1 contractors, by contrast, appear more consistent in holding OH&P levels, with some MEP trades continuing to push for uplifts. Overall, while OH&P levels are holding steady on the surface, underlying dynamics suggest growing pressure, especially where confidence in future workload is fragile.

In contrast, preliminaries are experiencing a greater degree of upward pressure than OH&P. While 68% of respondents noted no change over the past three months, 28% observed an increase—driven largely by labour-related cost pressures. Contractors cited rising staff costs, wage inflation and increased National Insurance (NIC) contributions as key drivers. Several also highlighted that performance bond costs have increased, while others noted a growing tendency to reallocate preliminaries into trade packages—especially in two-stage tenders—masking the true cost uplift. While this can make headline prelim figures appear stable, underlying costs are often embedded elsewhere. Overall, preliminaries are trending upward, even if not always visible as a percentage of works.

This dynamic is expected to continue. Around 73% of respondents expect OH&P to remain flat over the next 12 months, while 14% foresee increases and just 13% predict reductions. By contrast, inflationary expectations for preliminaries are more pronounced, with over a third (34%) anticipating further uplifts. This divergence reflects the more direct exposure of preliminaries to labour cost inflation, staff availability and regulatory burdens—whereas OH&P levels are being held steady through competitive tendering and client resistance.

References

^{[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.}