Input Costs

Key Inflationary Drivers

With labour costs remaining high and certain materials showing renewed price growth, inflationary pressures in the construction sector are intensifying. 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 1.2% over the past year (and 5.8% since its peak in July 2022). However, compared to early 2020 levels, before the pandemic, material prices remain approximately 38% higher.

The overarching theme for material prices in 2024 has been one of relative stability, but pockets of inflation remain. MEP items such as generators and switchgear continue to push prices higher with strong demand for these items also stretching out lead times. Steel prices have remained broadly flat since April 2024 but saw a slight uptick in August and September on the back of more positive demand sentiment in the market. Fresh Chinese stimulus policies have helped lift iron ore and coking coal prices from their downward spiral.

At the opposite end of the spectrum, aggregates and imported timber prices have fallen, largely due to a slowdown in new construction starts and weakened demand across certain key sectors. For imported timber, rising European production capacity and higher volumes of exports have eased pressure, as producers adjust to subdued demand in housing and other sectors. Aggregates have also seen price relief due to increased local production capacity and a shift toward recycled and alternative materials helping moderate demand, contributing to the downward price trend.

Commodity price trends have also been mixed. Oil prices have softened due to a measured response from Israel to recent attacks from Iran, reducing immediate geopolitical risks. Meanwhile, European natural gas prices reached their highest level this year due to forecasts of colder weather, a minor Norwegian outage and Middle East tensions.

The price trajectories for key construction metals are currently being shaped by a mix of global economic pressures, supply-chain challenges and fluctuating demand across sectors. According to World Bank data, metals prices rose in late September following China’s announcement of stimulus measures that would benefit metals-intensive sectors. Monetary easing and housing market support also bolstered prices. Previously, prices had been on a downward trend due to weak industrial activity in major economies. Where prices go from here will largely depend on the scale of future policy support in China and to what extent global industrial activity recovers.

Iron ore prices remain subdued, reflecting softer steel demand, though recent stimulus efforts have offered slight recovery support. Aluminium on the other hand moved to a four-month high in September, driven by a robust demand outlook from the renewable energy sector and China’s economic stimulus measures. A sustained increase aluminium and alumina prices is likely to put further pressure on cladding and façade costs.

Copper prices have been turbulent in 2024, with record highs above $11,100/t in May fuelled by limited supply and high demand from green infrastructure and energy transition projects. Prices later declined amid global economic slowdown concerns, which tempered some predictions of shortages. However, recent stimulus measures from China have renewed worries about the gap between mining capacity and rising demand for the metal.

With supply conditions for most base metals expected to remain tight, prices will remain responsive to shifts in the outlook for global industrial activity. Given the moderate levels of industrial growth anticipated in major economies, the World Bank forecasts metals prices to hold steady next year (2025) before drifting lower in 2026.

LABOUR TRENDS

The UK construction sector continues to grapple with a labour supply crunch. According to the Construction Products Association’s (CPA) Autumn 2024 forecast, the outflow of workers from the industry represents “the greatest issue facing UK construction in the medium-term”.

The situation has been exacerbated by a 15.9% decline in the construction workforce since Q1 2019, with the ONS Labour Force Survey noting a reduction of 384,467 workers. Despite this significant reduction, construction output – a measure of the value of work completed on site – has held steady. This anomaly largely reflects a slowdown in the labour-intensive residential sector, masking the full extent of workforce shortages in other sectors. Should housing activity pick up, this scarcity could intensify, pushing up costs and extending project timelines as firms compete for a dwindling pool of skilled labour.

Demographic trends further compound these challenges. According to Labour Force Survey data, 35% of the of the construction workforce in the UK is over 50 years old. The CPA estimates that within the next 15 years, at least 500,000 workers—roughly one quarter of the current construction workforce—are expected to retire. This exodus threatens to create a profound skills gap, limiting the sector’s capacity to meet demand.

Adding to the pressure, the end of 'grandfather rights' for CSCS cards at the end of 2024 will prevent many experienced older workers from working onsite unless they undergo retraining. Many of these workers may opt to exit the workforce rather than requalify, potentially accelerating the labour shortfall and hampering the industry’s ability to get the workforce back up to previous levels. Meanwhile, tightened immigration requirements now mandate a £38,700 minimum salary for migrant workers in skilled occupations, a threshold prohibitive for many construction SMEs that might otherwise sponsor foreign workers to fill critical roles. Together, these demographic, regulatory and policy-driven challenges underscore an urgent need for the construction sector to address labour shortages through innovative solutions.

Against this backdrop, vacancy rates are rising, signalling increased demand. According to the latest ONS data, vacancies remain well above the 10-year average, while recent PMI reports show a quickening pace of job creation as firms ramp up staffing in anticipation of growing workloads. This trend could further bolster earnings growth. Following a brief period of below-average growth in Q2, average weekly earnings have rebounded strongly, with ONS data showing a 4.7% increase in August (on a three-month, year-on-year basis), outpacing the long-term average of 3.1%.

Labour constraints are set to become one of the most significant obstacles to growth in the UK construction sector, likely resulting in rising tender prices and intensified competition for skilled workers. Addressing these challenges will require a proactive approach, from investing in skills development and automation to exploring alternative sourcing strategies, if the sector is to meet demand and avoid stalling critical infrastructure and housing projects.

ON-COSTS

Our Q4 TPI survey suggested that over the past three months, Overheads and profit (OH&P) levels have largely held steady, with 78% of respondents indicating no change from the previous quarter.

Meanwhile, preliminaries have faced more upward pressure. Nearly 40% of respondents reported an increase in preliminaries costs across projects of all values, reflecting a tangible response to the ongoing surge in operational expenses. In one retendered project, for instance, contractors submitting preliminaries costs that were 5% to 8% higher than they were a year ago for a project with identical programme requirements. These increases largely stem from rising wage costs, new regulatory compliance obligations, and heightened expenses for plant and machinery—all factors contractors must now account for directly in their preliminaries.

Our Q4 survey data underscores a growing expectation of cost increases across the UK construction industry over the next year. Notably, 52% foresee an increase in preliminaries, reflecting heightened pressures from wage costs and regulatory demands. Expectations for OH&P have also climbed, with 39% of respondents now predicting an increase—up from 25% in the Q3 survey. This shift suggests contractors are gradually preparing for upward adjustments in profit margins as inflationary forces and reduced competition reshape cost strategies.