Turner & Townsend is warning clients to plan for the return of rising construction inflation and to act now to secure strong, collaborative supply chains.  This comes as the UK government’s ambitions for housebuilding and infrastructure is threatened by falling construction capacity.

The global professional services company’s Winter 2024 UK Construction Market Intelligence report (UKMI), predicts that 2024 will be the bottom of an inflationary trough, with high demand and low supply across real estate and infrastructure likely to drive tender price inflation back up.

Turner & Townsend is forecasting that TPI rates over the next two years will increase from 3.0 to 3.5 percent for real estate, and from 4.5 to 5.0 percent for infrastructure.  This reverses the trend of softening inflation that has been seen since the end of the COVID-19 pandemic.

Construction demand is expected to be driven by key UK government pledges, such as £100bn of capital spending announced in the Autumn Budget, and its ambition to build 1.5 million homes in five years.  The industry could be set to be the enabler of important economic growth across the country’s priority sectors, from data centres to life sciences, but is being constrained by major challenges in the supply chain.

The report highlights that construction employment has fallen by 6.6 percent since Q2 2022, and levels are now 11.0 percent lower than before COVID.  Recent significant insolvencies including the UK’s sixth largest contractor, ISG, have contributed to this.  As a consequence, wage inflation is rising, with average rates 6.5 percent higher over the year to September 2024, and even greater for skilled workers.

One reason that overall inflationary predictions are not higher, is that while government targets are ambitious, in practice, new work orders in segments like housebuilding are actually falling – seeing a 22 percent decrease from Q2 to Q3 2024.  The high costs of labour and materials, together with the continued barriers of the planning system, are challenging viability for new housing schemes, though the government is hoping to unlock this with planning reforms due this month.

Given the scale of the challenge across the sector, Turner & Townsend is calling on clients to view contractors as true partners, not just suppliers – sharing risk and reward to avoid further insolvencies and encourage training and investment.

James Darrie, director, and strategic lead for Scotland at Turner & Townsend, says:

“It’s no surprise to those in the sector that overall activity and capacity is falling – but this is particularly impactful at a moment when construction should be at the very centre of driving economic revival and enabling growth across Scotland. Every key sector identified by the UK government in its industrial strategy relies on construction to build and grow, and this is equally true for Scotland’s key industries such as renewable energy, life sciences, and advanced manufacturing.

“To achieve this, we need to stem the wave of insolvencies and shrinking labour force. We must make sure talent is not lost as contractors close – recruiting or reskilling them to bring them back into the workforce. At the same time, we need investment in the next generation of skills – looking beyond traditional construction and education routes, across to tech sectors and different pools of talent that will help revolutionise the sector, embrace digital solutions, and drive productivity. We also need to break down the barrier that can often exist between clients and suppliers – working collaboratively as partners to share risk, discuss potential problems, and deliver projects successfully.”