Development Outlook Summer 2023: Tender price forecasts

Figure 14: 

Sources: BCIS (2021 and 2022); ONS; HM Treasury; Carter Jonas (forecast) 

Data from BCIS suggests that both building cost and tender price inflation likely peaked in Q2 2022, with annual increases at 14.6% and 10.3% respectively. General inflation is estimated to have peaked too, reaching 11.1% in October 2022 (ONS). At the close of 2022, tender prices were up 9.0% (BCIS), with inflation at 10.5% (see figure 14). Both measures have continued to slow since. 

Although material costs and inflation do carry weight in contract pricing, demand for construction services can accentuate or subdue the impact of fluctuating input costs. Over the last year, however, the declining number of tender opportunities has meant that many main contractors and their supply chains may have tightened their margins in order to secure workload, subduing the impact of the widely reported cost increases. 

Many factors driving up tender prices look likely to persist over the coming months, so we expect the upward trajectory to continue, albeit at a slower pace. For now, the challenging wider economy will act as a constraint on growth in the sector, with steep finance costs and stubbornly high (although decelerating) cost inflation squeezing profit margins and impacting profitability. Labour shortages will also continue to limit businesses’ ability to deliver projects efficiently. In turn, longer-term wage growth will keep edging upwards as businesses look to hire and retain staff in a competitive market. 

During a period of difficult market conditions, contractors will face conflicting pressures on business; a desire to secure workload, possibly with reduced margins and a self-preservation instinct which will lead to heightened caution about impending supply chain difficulties and risks in completing existing orders.   

A market downturn may present opportunities for a buyer of construction to achieve positive pricing outcomes at advantageous terms, but caution should be exercised to avoid buying work at unsustainably low cost levels. Conversely, contractor's risk appetite may recede leading them to pursue fewer, better-quality opportunities that they would be better able to manage. 

 

Employers are advised to carefully consider procurement routes to help ensure best project outcomes. Early and positive engagement is essential and high-quality tender documentation will be beneficial. Over recent years, design and build has established itself as the most appropriate procurement route for many projects, but it is important to consider alternatives, taking account of market conditions and the complementary skills of contractors and clients’ design teams.  

An alternative balance of risk may secure better outcomes. As the market builds momentum and the balance shifts in favour of contractors, they will seek to increase margins and be more selective of the projects they pursue - especially as available resources (most notably labour) are expected to remain tight. In this environment, projects will need to adopt a more collaborative approach to secure the appropriate calibre of contracting team.

As economic pressures ease further from 2025 and beyond, we can expect the construction industry to respond to more favourable market conditions with a surge in much-needed development. In turn, more activity in the market will lead to greater tender price growth.