Building costs will increase by 17% over the next five years, according to the latest construction forecast data from the Building Cost Information Service.
Over the same period, tender prices will rise by 19% and new work output, which contracted since mid-2023, is expected to grow by 21%.
The BCIS All-in Tender Price Index, which tracks the prices agreed between a client and a contractor at the point of ‘commit to construct’, grew by 2.3% in Q4 2024.
Dr David Crosthwaite, chief economist at BCIS, said: “Industry sentiment data continues to present positive readings, although since the autumn budget these are now less optimistic than at the time of our previous forecast in September, when the headline S&P Global UK Construction Purchasing Managers’ Index reached a 29-month high.
“We’re predicting that prices will grow more slowly than input costs in 2025 and that this trend will reverse from 2026.”
Employer NICs rise impact on labour costs
On the input costs side, labour remains the main driver, although annual growth in the BCIS Labour Cost Index is expected to have slowed to 5.3% in the final quarter of 2024.
BCIS said that increases to employer National Insurance contributions (NICs) and the National Living Wage (NLW) will significantly impact labour costs, with a monthly increase of 2.5% forecast in April compared with March.
In the 2024 autumn budget, the government announced that the NLW will increase by 6.7% to £12.21 per hour for those aged 21 and employer NICs from 13.8% to 15% from April 2025.
The BCIS Labour Cost Index is forecast to increase overall by 19% up to Q4 2029.
Materials cost inflation has been moderating since peaking in 2022. Annual growth in the BCIS Materials Cost Index was negative from Q3 2023 to Q2 2024. BCIS expects the index to grow by 15% over the forecast period.
BCIS added that output figures for 2024 remained disappointing. The latest quarterly data for Q3 2024 shows a 4.1% decrease in new work compared with Q3 2023.
Crosthwaite said: “We’re expecting new work to have contracted by 4.7% overall in 2024 as a result of declines in most sectors. We’re forecasting a return to growth from 2025, with recovery fuelled by housing and infrastructure spending.”
