Executive Summary
MACRO ECONOMIC CONDITIONS
Sluggish economic growth stands alongside above-target levels of consumer price inflation and low levels of unemployment, signifying an economy struggling to escape a stagflation trap.
CONSTRUCTION PIPELINE PROSPECTS
This year has seen increased levels of works completions, but reduced volumes of replacement workload, raising concerns over workload pipeline gaps.
INPUT COSTS
Despite moderation of increases in commodities and general materials costs, the sharp dose of input cost inflation from last year continues to put pressure on margins.
TENDER PRICE FORECAST
Construction input costs remain at high levels, increasing tendering competitiveness as contractors attach higher priority to securing pipeline workload.
MACRO ECONOMIC CONDITIONS
Construction industry continues to operate in conditions of uncertainty
The Building Cost Information Service (BCIS) is currently projecting uplifts of 3.50% and 3.25% in its All-in Tender Price Index and General Building Cost Index respectively. These figures would, in ordinary times, be reflective of an average year in which cost changes are marginally outrun by value changes in a stable economy.
The current situation differs in that input costs spiked last year and have not really fallen back, other than in terms of steel and timber costs. As a result, the current tender price uplift occurs in the shadow of already high levels of input costs. In addition, workload availability, although not stalled, is certainly becoming more of an issue as existing projects roll to completion.
Consequently, estimators are confronting high levels of input costs alongside the increasing necessity of obtaining replacement workload. Inevitably, this results in the trimming of margin and further equivalent pressure being imposed all the way down the supply chain, which in turn brings with it liquidity concerns.
CONSTRUCTION PIPELINE PROSPECTS
HS2 cuts leave a hole in workload projections
The partial recovery forecast for 2024 has yet to factor in the cancellation of the northern leg of the HS2 high-speed rail project. The loss of predominantly heavy civil engineering work will punch a hole in some major contractors’ and subcontractors’ workload projections, but will release a disproportionately lesser amount of labour to the remaining market, given the plant-intensive nature of civils work.
INPUT COSTS
Less volatility expected over next 12 months
Nationwide, there has been a slight fall in materials costs over the year to October, according to BCIS data, although timber and steel prices are both down by well over 20%. While the overall index is merely indicative, MEP equipment and materials costs stand out, demanding premium pricing.
The BCIS reports, and its view aligns with RLB’s regional commentaries, that the ongoing tailing-off of workload, and only partial recovery next year, suggests reduced upcoming volatility in input costs, with only a 1% rise in materials costs expected over the next year.
Labour costs are up by 6.5% over last year to October, against a background of high levels of consumer price growth. The upcoming year is forecast to show a further uplift of over 5%, which will impose added pressure on bid pricing.
TENDER PRICE FORECAST
Slowing of pipelines in 2024 will increase bidding competitiveness
Nationwide, RLB’s tender price forecasts for 2024 show a general easing of uplifts, with associated increases in levels of contractor and subcontractor bidding competitiveness.
The need for replacement workload will, in many cases, drive bidding motivations, even though input costs are set to match uplifts in prices for work.
The softening this year of materials prices, and in particular the cost of timber and steel, does provide some leeway. Yet the BCIS General Building Cost Index does not forecast a fall below the level of tender price uplifts until 2025, suggesting that next year will see a period of tight and compressing margins across the board.
Such a situation brings with it continuing challenges for construction companies trying to balance the imperatives for workload against the need for margin on that workload.
RLB weighted average TPI uplifts
Q4 2023 vs Q3 2023
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 October 2023 (ONS).
KEY REFLECTIONS
Industry faces prospect of sluggish growth
Although the wider national economic position holds within it the prospect of growth, coming as it does from a very low base, participants in the supply chain still face the challenge of filling order books against the backdrop of uncertain workload availability.
Input costs will stay high in 2024
Steel and timber prices have fallen, yet prices of general building materials remain high, with no real forecast of a fall in the coming year. Similarly, labour costs are going into 2024 at a high level after significant 2023 increases, with more to come next year.
Tender prices need delicate balancing
The perennial pricing challenge for contractors and subcontractors is even more sharply focused in the current circumstances. If new workload does not expand sufficiently to replace that which is completing, then more builders will be competing for decreasing workload.
