PBC Market and Cost Commentary – 2025
2024 was a challenging year for the industry with a change of government, mixed economic performance and muted construction growth.
Whilst there were interest rate cuts towards the latter part of the year and a fall in inflation from highs the year before these were tempered by several high-profile contractor insolvencies and the announcement in the budget relating to an increase in national insurance contributions which will put pressure on employers.
UK ECONOMY
Inflation fell to its lowest for some months in September 2024, with the Consumer price inflation (CPI) at 1.7%, at which point it was below the Government’s target of 2%, a target that wasn’t forecast to be hit until Q2 2025. The CPI did however rise through October and November to 2.6% as a result of increases in fuel and clothing prices.
The Bank of England forecast inflation to stabilise through 2025 finishing the year at 2.5% which would suggest costs are unlikely to increase significantly on a project level through the next 12 months.
GDP was flat at the end of 2024 with 0% growth in Q3 compared to the previous quarter but overall was 3% above the pre-pandemic level at Q4 2019. There are mixed forecasts for the year ahead with the OECD increasing their forecast for UK GDP growth to 1.7% from 1.2% which is higher than the IMF’s forecast of 1.5% for 2025.
Interest rates were reduced by 0.25% in August 2024 lowering from 5.25% to 5% and whilst the BoE voted to maintain the rate at 5% in its September’s review, a further 0.25% reduction was confirmed in November 2024 taking the BoE base rate to 4.75%. Looking at the year ahead, the BoE are expected to continue to cut rates assuming inflation remains stable however there are differing views on how far the rate will be cut. Some forecasts suggest the BoE will not cut below 4% however, Goldman Sach’s analysis suggest the rate could be cut as low as 2.75% by the end of the year.
CONSTRUCTION INDUSTRY OUTPUT
Construction output increased 0.8% in Q3 in comparison to Q2 which was mostly driven by an increase in new work at 2% offset by a reduction in repair and maintenance work which decreased by 0.6% as reported by the ONS. Overall, disappointingly, construction output declined in the year by 0.8%.
The forecast for 2025 is positive with the Construction Products Association (CPA) forecasting construction output to rise by 2.5%, mostly driven by the housing market and the new government’s push for more houses to be built and a reform to the planning process.
Glenigan forecast an 8% increase in underlying starts in 2025 compared to 2024, with this forecast excluding large projects over £100m which is encouraging.
On a sector level as noted above housing is forecast to grow, particularly social housing aligned with the government’s funding and housing construction targets. Private housing starts could also rise should further interest rate cuts materialise which will stimulate the market and demand.
Offices are forecast to slowly recover in the year with an increase in demand driven by a mandate for a transition from working from home to back to the office, however it is believed growth will be focused on refurbishment rather than large scale new development. There is growing demand for premium office space with strong sustainability credentials from corporate occupiers which will also drive retrofit opportunities in the sector.
Industrial is also forecast to recover through 2025 as manufacturing, logistics and online-retail demand which will be fuelled by an increase in consumer spending via online shopping.
Hotels and leisure as a sector performed well in 2024 and growth in the sector is forecast to continue through 2025 and 2026 driven by a forecast rise in spending on hospitality and leisure activities and a boost in international tourism.
LABOUR & WAGES
The ONS Average Weekly Earnings dataset shows an increase of 5.2% for regular (excluding bonuses) and total earnings (including bonuses) and 2024.
In 2025 the National Living Wage (NLW) for those aged 21 and over will increase from £11.44 per hour to £12.21 per hour which is a 6.7% increase and will take effect from 1st April 2025. As a result, the BCIS Labour Cost Index is forecasting an increase of 2.5% in April 2025 when compared to the forecast for March 2025.
The National Institute of Economic and Social Research (NIESR) forecast real wage growth to grow by 2.2% in 2025 following growth of 0.7% in 2024.
Within the construction industry wages increased by 6.9% in 2024 which was the 4th highest annual increase in average earnings across all sectors within the ONS datasets.
There is still a significant shortage in labour in the industry, the Construction Industry Training Board (CITB) predicts that 251,500 more workers will be needed to meet construction industry output over the next 5 years.
Following the budget announcements in 2024 there is a fear that the 1.2% increase in employer national insurance contributions will impact labour costs, stifle job creation and lead to a rise in unemployment.
MATERIALS AND TENDER PRICING
Generally, the cost of materials has levelled off with the BCIS Materials Cost Index noting growth of 1% from 2024 to 2024, however the forecast for 2025 of 3.3% suggests material cost pressures will have an impact on projects over the next 12 months.
Building costs rose by 2.9% in the year 2023 to 2024 and are forecast to further increase in 2025 by 4.7% based on the BCIS General Building Cost Index.
Tender pricing increased 2.3% in the year past and the BCIS Tender Price Index forecasts a 3.8% rise in 2025.
Generally, availability of materials and products is good and should not present a problem through 2025.
BUDGET & NEW GOVERNMENT
The new Labour government’s first budget in 14 years is set to have a mixed effect on the industry.
For businesses, several tax rises were introduced that will directly impact operating costs, particularly the raise in employers’ national insurance contributions which could have a negative effect on business growth, potential redundancies and a slowdown in recruitment of new talent into construction.
The budget did however include sizable sums for capital investment totalling £100bn over 5 years including the following:
- Money to fund the HS2 tunnel to Euston,
- £5bn to meet house building targets,
- £1bn set aside for removal of dangerous cladding,
- £6.7bn for the Department for Education including rectifying the issued with RAAC and building of new schools,
- £3.5bn for the aerospace, automotive and life science sectors,
- £1bn for the NHS estate.
Outside of the budget Labour have set out policies designed to make the industry more efficient and increase output, most notably reforming of the planning system and building on the ‘grey belt’.
The National Planning Policy Framework (NPPF) defines the ‘grey belt’ as –
‘Land in the green belt comprising previously developed land and any other parcels and/or areas of green belt land that make a limited contribution to the green belt purpose, but excluding those areas or assets of particular importance’
It is down to the Local authorities to identify grey belt areas within their green belt and the following set of guidelines have been established to govern any potential developments within these areas –
- Brownfield first: Within the green belt, any brownfield site must be prioritised for development.
- Grey belt second.
- Affordable homes: Plans must target at least 50% affordable housing delivery when grey belt land is released.
- Boost public services and infrastructure: Plans must include ‘Levelling Up’ proposals such as boosting public services and local infrastructure, like more school and nursery places, new health centres and GP appointments.
- Improve genuine green spaces: making them accessible to the public, with new woodland, parks and playing fields.
The government have also set out a target of developing 1.5m new homes within the next 5 years which is based around regional area needs.
To assist with the house building targets the government have introduced a Planning and Infrastructure Bill which is designed to make the planning process more efficient for construction of homes and to speed up the delivery of infrastructure projects. The new bill also hands power to mayors and local authorities through devolution to develop their own growth ambitions.
PROJECT AND BUILDING CONSULTANCY (PBC)
As we enter 2025 whilst there are positive forecasts for growth and output, there are clearly still significant challenges within the industry that will require careful planning and management to overcome.
Identifying and producing a detailed project execution plan that encompasses careful management of the key aspects of time and cost will be essential in delivering a successful outcome for clients.
Outside of the economic factors noted within this report, wider elements relating to regulation (Building Safety Act), Sustainability and ESG will all have a significant part to play in delivering high quality projects successfully.
GET IN CONTACT:
PBC are well placed to provide project and cost management, building regulatory and compliance, monitoring, and professional services expertise to ensure the best outcome for our clients.
Please do get in touch to discuss your project requirements in greater detail:
https://pandbc.co.uk/services/cost-consultancy/
Produced by Chris Jones. Director of Cost Consultancy – January 2025
