Labour costs are set to overtake the cost of materials as the biggest challenge facing the construction industry during the year ahead, according to new analysis from the Building Cost Information Service (BCIS).

As part of its quarterly data briefing on construction inflation, BCIS is forecasting a 10 per cent uptick in labour costs over the next year, as high inflation and the cost-of-living crisis put pressure on wages.

The impact of inflation is compounded by ongoing labour shortages across the industry, with 69% of British civil engineering firms reporting difficulties finding skilled operatives for infrastructure projects that include HS2.

Dr David Crosthwaite, chief economist at BCIS, reported that annual growth in the BCIS labour cost index is predicted to increase to five per cent in the third quarter of this year, rising to 8.3 per cent in the second quarter of 2024. He said:

“While the cost of materials is now stabilising, labour is set to become the next biggest cost driver for construction going forward.

“Labour site rates continue to rise faster than wage awards. We’re expecting a period of catch-up, with people demanding wage increases that go towards offsetting some of the price rises we’ve seen across the rest of the economy.

“It’s also important to remember that while material cost increases are slowing, levels are still significantly higher than they were three or four years ago.“

According to data from the Office for National Statistics (ONS) analysed by BCIS, there has been a declining trend in total employment in construction since the pandemic, mostly driven by a fall in self-employed workers.

Although the number of insolvencies is high – with more than 1,000 construction firms going bust in the last quarter – the total number of construction businesses operating has grown exponentially, from just under 200,000 in 2014 to approximately 375,000 in 2022, despite recent crises.

Dr Crosthwaite added:

“Since 2019, the overall construction workforce has shrunk by 181,000 people – 98 per cent of whom were self-employed. The number of those employed has also fallen, but by a smaller proportion.

“The volume of this decline is significant. What’s interesting is that despite the number of insolvencies having risen and the number of workers falling, the number of firms and labour productivity both appear to be increasing, suggesting that the industry is becoming more efficient.“

BCIS forecasting data and figures from the Office for National Statistics (ONS) show total construction work output is now above pre-pandemic levels, at £46,409m for Q1 2023, driven by growth in the repair and maintenance industry. However new work output has declined in the last quarter and remains below levels recorded in 2017, at £27,822m for Q1 2023.

For more information about BCIS, visit the website at www.bcis.co.uk