Executive Summary
MACRO ECONOMIC CONDITIONS
Key data
GDP forecasts for 2024:
+0.70%
(OBR)
+0.70%
(OECD)
+0.60%
(IMF)
CPI forecasts for 2024:
+3.60%
(OBR)
+2.87%
(OECD)
+3.70%
(IMF)
Unemployment forecasts for 2024:
4.60%
(OBR)
4.74%
(OECD)
4.60%
(IMF)
Market situation highlights importance of effective cost management
Consumer price inflation is returning to more acceptable levels, but remains key to government policy and interest rates, even though low levels of unemployment signal a supposedly active economy. Almost flat GDP growth, however, underlies all of this.
The Building Cost Information Service (BCIS) is now projecting uplifts of 2.10% and 3.20% for 2024 in its All-in Tender Price Index and General Building Cost Index respectively.
These figures reflect a tight market with very competitive bidding coming up, which may yet result in problems for contractors in maintaining the boundaries of cost levels, emphasising the need for comprehensive project cost control and interim payment management.
CONSTRUCTION PIPELINE PROSPECTS
Key data
New construction work done volume:
-0.05%
year to November 2023 (ONS)
Repairs and maintenance work done volume:
+8.24%
year to November 2023 (ONS)
Work done volume:
+3.18%
year to November 2023 (ONS)
New orders volume:
-14.12%
year to September 2023 (ONS)
Concerns over pipeline remain while redistribution of HS2 funding is eagerly awaited
The concerns voiced in Q4 2023 are continuing in respect of contractors’ pipeline of workload. The need to refill order books is becoming more pressing and is slowly impacting on procurement options, softening, to an extent, contractors’ reluctance to go with single stage bidding. That said, local conditions differ widely.
The proposed redistribution of funding previously set for the now cancelled northern leg of HS2 has yet to be determined and is eagerly awaited throughout the regions that are in line to benefit. While contractors were already focusing on refilling order books, the cancellation has not helped, but indications on how the freed-up money is to be spent could assist matters.
Clearly, the HS2 works were very much further on in the delivery process than replacement projects can be, so the prospect is of delay to the actual spend, regardless of the money being made available.
INPUT COSTS
Key data
Input costs forecast for 2023:
+3.10%
(BCIS)
Input costs forecast for 2024:
+3.20%
(BCIS)
Materials and labour costs set to moderate in 2024
Materials costs have softened considerably but, overall, inflated levels remain. Specific local conditions and make-up of particular projects render blanket statements about input cost problematic, with real on-the-ground local insight key to consideration of any particular project.
In some regions, margin trimming is noted in the fight to rebuild workload pipeline, but input costs are inescapable. Some locations report reduction of risk allowances, but whether that is a good thing depends on the rationale for reductions.
With steel and timber prices still well down on last year’s figures, and workload numbers tailing, emphasis is moving toward the obtaining of work rather than so much on the effect of the previously rapid inflation of input costs.
Expectations for input cost movements over the next year or so suggest a more ‘normal’ state of price inflation, but that could be affected by supply chain issues arising from goods coming into the country from far afield, given the Red Sea situation. Labour costs are similarly moderating, though still tailing a falling level of general consumer price inflation.
TENDER PRICE FORECAST
Key data
RLB Weighted Average TPI 2024:
+3.19%
(RLB)
BCIS Tender Price Index 2024:
+2.10%
(BCIS)
Urgency for replacement workload will influence bidding and procurement
Nationwide, RLB’s tender price forecasts for 2024 depict a very similar situation to that shown last quarter, with only very marginal changes, while still acknowledging an ongoing impact of workload wind-down as existing projects complete. Return to market of some stalled projects will depend on improved market sentiment and easing of interest rates to stimulate levels of activity.
Recent high-profile insolvencies provide salutary evidence of the risks in construction. Forecast values for upcoming uplifts are little changed on last quarter, as market exigencies have really not moved to any great extent. Tendering competitiveness and workload strictures are already baked into the forecasts, so changes will arise in upcoming forecasts as conditions change.
RLB Tender Price Index uplifts published in Q1 2024 CMI vs published in Q4 2023 CMI
The chart above shows an average of RLB's regional tender price forecasts for the respective years, weighted by regional new orders volumes of workload for the year to November 2023 (ONS).
KEY REFLECTIONS
Market uncertainty slowing project starts
Falling levels of general inflation, together with an easing of interest rates and an upturn in market sentiment could form a basis for re-invigoration of construction activity, but for the moment, uncertainty appears to be constraining some projects’ advancement to market.
Bidding expected to be more competitive
With the increasing flexibility of contractors and subcontractors due to the need to obtain fresh workload, expectation would be that bidding will become more competitive and projects could benefit from more widely available building resources in the marketplace.
Outlook remains cautious despite falling costs
Although levels of input cost uncertainty are somewhat alleviated, all is not yet business-as-usual because of ongoing economic and geopolitical considerations that have yet to be resolved and may continue for some time.
