Navigating construction cost uncertainty

Moving through 2025, the UK construction market has found itself balancing signs of stability against continued headwinds. Despite positive momentum with 1.6% growth in 2024 that brought activity close to pre-COVID-19 levels for the first time in four years, elevated material and labour costs continue to add pressure to the sector. Despite interest rates stabilising to 4% in recent announcements, they remain high enough to constrain investment sentiment.

Although this unpredictable climate has prompted caution among certain investors and developers, analysing and evaluating cost drivers presents opportunities for organisations to adopt a strategic, forward-thinking approach to cost control and leverage current real estate investment prospects.

While monitoring existing and projected material cost trends remains fundamental to uncertainty management, success also depends on addressing comprehensive factors including procurement approaches, supplier evaluation, market conditions, and workforce availability to safeguard projects against financial vulnerabilities.

JLL forecasts warn of further increases in the Tender Price Index (TPI), with a 2.5% increase projected in 2025 and 3.0% in 2026. This continued upward trend demands strategic approaches to cost management.

While 2023-2024 saw only minor fluctuations in construction material prices, these costs remain 29-43% higher than 2019 levels, and stabilised prices in recent years represent a new baseline rather than a return to pre-pandemic levels.

Certain products and materials face more acute pressures - steel and metalwork have seen slight reductions but remain at elevated levels, while M&E equipment faces ongoing supply chain pressures. Further to this, energy costs continue to influence the entire construction ecosystem, impacting not only material production but also contractor operations and building performance.

In response to economic uncertainty and rising costs, there has been a growing desire in the market to secure supply chains in projects and achieve greater cost certainty, with a notable increase in two-stage procurement processes in responses.

Two-stage procurement enables earlier contractor and supply chain engagement, which can provide improved price visibility and some protection against market fluctuations compared to traditional single-stage approaches, though complete insulation from market volatility is rarely achievable. The key benefit is earlier collaboration and supply chain planning rather than complete market risk elimination.

For investors with complex projects, or multi-project portfolios, advanced planning unlocks opportunities to leverage larger procurement volumes, potentially offsetting some cost increases through economies of scale.

In addition, with UK construction firm insolvencies closely mirroring TPI fluctuations, and an uptick in insolvency rates among small to medium construction firms means comprehensive contractor due diligence has become mission-critical. Smart clients increasingly benefit from fundamental risk assessments as part of a holistic cost management strategy.

Thorough pre-qualification procedures with rigorous assessment of financial standing should include scrutiny of outstanding claims that might impact contractor viability. Implementing robust financial assessments and requiring package-specific testimonials can expose potential risks before they impact project delivery.

Labour shortages continue plaguing the UK construction sector, with a shrinking talent pool, and some trades (particularly structural steel frame erectors) facing an ageing workforce. Projects must consider regional workforce availability in planning phases. Market capacity assessment has become non-negotiable to ensure project viability, especially when considering regional variations in labour availability.

In this environment, robust budgeting with professional cost planning is vital, rather than reliance on published rates which may not reflect market conditions. Early market engagement helps uncover capacity constraints before project launch, preventing costly delays later in development.

Timing market engagement requires sophisticated market intelligence that goes far beyond published indices to avoid both wasted pre-tender efforts and exposure to further cost inflation.

Several strategic approaches can build resilience into project planning. Regional cost planning expertise and advanced market intelligence become essential tools to understand and mitigate delays from local factors such as labour market availability or related investment pipelines.

Developments have increasingly implemented robust contractor evaluation frameworks. As insolvency threats escalate, mitigating commercial and warranty-related risks becomes paramount through detailed financial scrutiny and regular monitoring across construction phases.

Procurement methodology deserves careful consideration, where cost consultants can provide strategic counsel. While single-stage tendering has its merits, two-stage procurement frequently offers superior outcomes by strengthening supply chain arrangements and enhancing cost certainty. Though this route may involve additional expense, it delivers market volatility protection and facilitates meaningful value enhancement opportunities during the design development period.

As we move into 2026 and beyond, uncertainty will continue to shape the outlook for project costs, shifting focus toward local sourcing strategies and innovative construction approaches. Despite these challenges, construction sector confidence remains positive, with early indicators of resurging market activity across the UK.

For investors and developers willing to embrace proactive cost management strategies, this uncertainty presents an opportunity to gain a competitive advantage through risk mitigation, commercial planning and execution. Those who invest in professional cost expertise unlock the difference between project success and costly overruns in today's complex construction landscape.

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