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Sat December 09 2023

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Build cost reductions lag material prices, says report

24 Aug Research has found that build costs are continuing to rise for contractors despite materials prices now dropping.

SCF operations lead Kingsley Clarke
SCF operations lead Kingsley Clarke

The latest quarterly benchmarking survey by Southern Construction Framework (SCF) has found that building costs in the second quarter of 2023 (April to June) increased by an average of 3% when compared to the previous quarter. This was primarily attributed to inflationary pressures derived from rising utilities and labour costs.

However, data from the Department for Business & Trade’s ‘all work construction material price index’ showed that materials prices fell by 1.3% in June and are now 2% lower than a year ago.

The trades with the greatest quarterly increase in building costs in Q2 in southern England include M&E at 5%, dry lining at 4%, curtain walling at 4% and groundworks at 4%.

SCF operations lead Kingsley Clarke said: “Our data shows that a drop in material prices is not being fed through the supply chain, with a lag existing between a drop in material costs and overall build cost reduction.

“With insolvencies at near record highs, subcontractors, which have potentially been more greatly impacted by inflation due to lacking economies of scale and working with tight margins, may now be looking to improve margins through keeping costs higher.

“With product prices still being up 12% since January 2022, the fact that there is now deflation on a 12-month basis may therefore have little impact on contractors.”

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Labour costs are also having an impact on build costs as they continue to rise, with the ability to fix labour costs remaining a challenge within the industry, SCF said. Trade supply chains have also reported that staff turnover is on the rise.

Looking ahead to 2024, SCF main contractors (which include many of the UK’s leading construction companies) and their trade supply chain forecast building costs to rise by 4% by Q2 2024. Carpentry & joinery are expected to see the highest increase, at 6%, while brickwork, M&E and concrete frame construction are predicted to increase by between 4% and 5%.

This is supported by BCIS, the Building Cost Information Service, which is forecasting build cost inflation of 3.2% between the second quarter 2023 and Q2 2024.

Adam Sanford, another SCF operations lead, said: “Costs are still high across the industry, and while contractors are expecting a 6% lower increase in building costs over the next year, compared to this time last year, when contractors predicted a 10% increase, many businesses are still feeling the pinch and expecting continued market volatility as inflation remains sticky. 

“We operate on a two-stage open book procurement basis, and we strongly believe it’s important to take a collaborative and integrated approach to pricing as this encourages transparency. It means that there are constant discussions around delivery costs as market factors impact a project.”

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