Construction costs are predicted to rise by 17 per cent over the next five years, according to a new forecast from the Building Cost Information Service (BCIS).
Its latest data also found that tender prices could increase by 15 per cent over the same period and new work output will grow by 19 per cent.
Dr David Crosthwaite, chief economist at BCIS, also warned that 2025 will be another “difficult” year for the construction industry.
“Sentiment in construction has changed significantly since the start of the year and, with economic growth stagnating and inflation starting to pick up again, stagflation is becoming a real possibility this year,” he said.
“As a result, we’re forecasting that 2025 will likely be another difficult year for construction with only minimal output growth evident before growth accelerates later in the forecast period.
“While the cost of borrowing is reducing, albeit slowly, we have yet to see increased levels of investment in built assets. Furthermore, we expect to see increases in both input costs and tender prices due to the National Insurance uplift, resulting in potential affordability issues.”
The analysis, released yesterday (26 March), said the BCIS All-in Tender Price Index saw annual growth of 2.3 per cent in the first quarter of this year.
It said labour remained the main driver on the input costs side, though annual growth in the BCIS Labour Cost Index was expected to have slowed in the first quarter of 2025 to 4.7 per cent.
Increases to employers National Insurance contributions and the National Living Wage will significantly impact labour costs, it found, with a monthly increase of 2.5 per cent forecast in April compared with March. The BCIS Labour Cost Index is forecast to increase overall by 18 per cent up to the first quarter of 2030.
Its findings mirror cost consultancy Turner & Townsend’s latest UK Market Intelligence report published on Tuesday (25 March), which predicted that higher labour costs will “continue to pressure margins”.
Employer National Insurance contributions will jump from 13.8 to 15 per cent next month, while the earnings threshold at which these kick in will be slashed from £9,100 to £5,000 per employee.
”Unless contractors can pass on these higher labour costs in their tender prices, we can expect further erosion of their already-low margins,” said Turner & Townsend.
The BCIS said materials cost inflation had been moderating since peaking in 2022 and annual growth in the BCIS Materials Cost Index was in negative territory from the third quarter of 2023 to the second quarter of 2024. However, it now expects the index to grow by 15 per cent over the next five years.
It said output figures for 2024 remained disappointing, with the latest data from the Office for National Statistics showing total new work output fell by 5.3 per cent compared with 2023.
“We expect subdued growth in new work output through 2025 as a whole, with more robust growth evident over the remaining years of the forecast period,” Crosthwaite said.
“Much of the growth will be fuelled by a recovery in housing output, which is expected to grow significantly during the period, although from a relatively low base.”
Earlier this month, construction consultancy Arcadis made a similar prediction in its market view for spring.
It also warned that sustained recovery was by no means certain due to a sharp fall in new orders – almost 20 per cent since July.
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Nicola Harley