2024 – a review of the year in the construction industry

We began 2024 asking the question: is construction inflation the new normal? With Bank Rate holding steady at 5.25%, high materials prices, and escalating labour costs, the outlook appeared challenging. The ongoing tensions in the Middle East also compounded these pressures, adding to the uncertainty. However, as the year progressed, reasons for cautious optimism began to surface.

In August, the base rate fell to 5% after many months at 5.25%; a positive sign inflationary pressures were easing. This, coupled with the ambitious plans unveiled by the new Labour government in early July sparked a wave of optimism and helped to buoy investor confidence, particularly in the housing sector.

And, as we approach the end of the year, some industry data indicates an upturn in construction output, demonstrating the resilience of an industry that’s ever-finding ways to adapt in the face of its challenges. However, the collapse of ISG in September – the biggest since Carillion in 2018 – served as a stark reminder that even the largest firms aren’t immune to financial strain. Construction is consistently the most affected sector; highlighting its continued vulnerability. Here, we look back at another eventful year in construction.

Resources price inflation cools

We started the year facing yet more inflationary threats to the industry, caused by the Red Sea shipping crisis, instigated by the Israel Hamas conflict. Although the industry braced itself for escalating prices due to supply chain issues, materials cost inflation continued to cool overall. After 14 consecutive months of decline, annual growth in the BCIS Materials Cost Index finally returned to positive territory in July.

Despite this, labour costs remained the main cost driver on projects throughout the year with construction wages playing catch up on wider inflation. Annual growth in the BCIS Labour Cost Index, which incorporates the movement in nationally agreed wage awards, was around 8% for the first four months of 2024 and is at around 5% coming to the end of the year. The latest ONS data shows weekly earnings in construction in October were 6.9% higher than in the same month last year.

Data from the Hays/BCIS Site Wage Cost Indices showed stronger growth in skilled trades, reflecting notable skills shortages, particularly in civil and mechanical engineering; a gap felt most prominently in the delivery of major infrastructure projects, so crucial to economic growth in the UK. As the new Labour government pushes ahead to deliver on its key missions, which include renewable technologies and more sustainable methods of construction, it’s possible the shortage of skilled green workers will compound these increases.

A new government sparks optimism

From the launch of Great British Energy to proposals ‘to unleash a UK solar rooftop revolution’, the new Labour government wasted little time in putting its manifesto aims into action, building on its belief that ‘economic growth, energy security, lower bills, and addressing climate change can be complementary’. But it was Labour’s commitment to build 1.5 million homes in England over the election cycle that provoked mixed reactions from the industry. Organisations across the built environment welcomed Labour’s plans to overhaul the planning system – which included freeing up ‘grey belt’ areas and streamlining the approvals process. These reforms have been cemented in the final version of the National Planning Policy Framework (NPPF), released this month with an amendment to the requirement for developers to deliver 50% affordable housing on grey belt sites; this has now been lowered to 15%.

However, scepticism continues to reign with several leading figures and economists casting doubt on how the targets will be achieved. In the main, they’ve highlighted the lack of power the government can wield in this area; ultimately, it’s property developers that influence the supply and demand of housing to maximise their returns.

Although a further decrease in Bank Rate (to 4.75% in November) has helped to lower the cost of borrowing and restore faith in the wider economy, it remains high.

Due to the lag in data, it will be a while before we start to see any ramping up in housing activity and the government has tried to manage expectations with the caveat that numbers won’t start to rise significantly until 2027. A rudimentary division of 1.5 million homes by 20 quarters over the course of the Parliament gives a target of 75,000, and we’re already six months in. The latest ONS stats, showing that in the second quarter of 2024, 25,510 homes were started and 44,550 were completed in England, lay bare the scale of the pledge.

Hopes that the new government would restore investor confidence were also dashed with the announcement of National Insurance hikes in the Autumn Budget. This, coupled with the lack of any government commitment to major infrastructure projects, left the construction industry wondering which budget policies could ‘get Britain building again’ and boost growth.

Tender prices and the Autumn Budget

Skilled labour shortages have also impacted tender pricing throughout 2024. The BCIS TPI Panel has consistently highlighted that costs continue to be more volatile for mechanical and electrical (M&E) work, citing the high demand for data centres and equipment like generators and sprinklers as a contributing factor, as well as supply chain disruptions due to contractor insolvencies.

Despite an overall cooling in materials cost inflation, tender prices could rise further, as it’s likely contractors will absorb the increased employment and tax costs announced in the October Budget.

Rain in vain

Prolonged periods of heavy rainfall and colder-than-average temperatures characterised the first half of the year, with June experiencing the most rainfall in the UK; standing out as an unusually wet month compared to the historical averages. This was a likely contributing factor to the 1.3% decline in R&M volumes for July, as reported by the ONS, as well the majority of sectors across construction. As more extreme weather events look set to continue, it will become increasingly important for the sector to invest in technologies that help them mitigate potential delays caused by these, as well as investing in more weather-resistant materials, chemicals and sealants.

Construction output figures indicate recovery still hasn’t arrived

This year the construction industry showed signs of recovery in certain areas, particularly in civil engineering and commercial construction. Towards the end of the year (November) data from the S&P Global UK Construction Purchasing Managers’ Index indicated growth for nine consecutive months, though overall optimism hasn’t quite translated into output data yet.

The latest ONS figures show that, while new work grew overall by 0.2% in October on a monthly basis, it was down 1.2% on the same month last year. Repair and maintenance declined by 1.3% compared with September and was 0.2% down on the year.

ISG collapse sends shockwaves through the industry

Insolvencies remained high, with 4,208 construction firms failing in the year to October 2024, a slight improvement from the previous year with 4,324 insolvencies recorded in the year to October 2023. It’s almost become expected in the industry that many SMEs in the sector will struggle with cash flow management – especially as so many operate on tight profit margins. But news of the collapse of ISG – a company with a £2.2 billion turnover – demonstrates how vulnerable each company can be and highlights the importance of mitigating negative impacts on cash flow – even for companies with a higher turnover. ISG’s collapse is likely to have serious knock-on effects for the sector, as subcontractors and suppliers are left unpaid, potentially causing more insolvencies.

The ballad of Gove and Sparks

After a nearly four-year battle, the saga of Gove V Sparks finally reached a conclusion at the start of December when retailer M&S was gifted its best present of the year; the green light to demolish its flagship store on Oxford St and make way for a nine-storey building housing a retail space, cafe, gym and office. In a ‘will they, won’t they’ tale that’s sparked enough drama to rival one of their Christmas ads, the original plans – submitted to Westminster City council back in 2021 – have been beset by court cases and opposition from heritage and sustainability experts. After then-housing secretary Michael Gove stepped in to refuse the application in July 2023, the decision was overturned by a judicial review earlier this year and finally given the go-ahead by the current housing secretary Angela Rayner.

There’s no denying this is a case that’s caused emotions to run high and regardless of where sentiment lies on the final decision, one thing is clear – cases as complex as this do need to be carefully considered on an individual basis. But the M&S debacle also highlights the need for greater transparency regarding how these cases are reviewed. In terms of the embodied carbon impact of demolishing and rebuilding, it makes sense to have whole life carbon assessments mandated through Building Regulations, so that developers have a clearer idea of what’s expected of them, from the outset.

Indeed, there was further evidence this year that demand is growing for whole life carbon assessments. A survey by RLB published in April revealed that 33% of polled contractors were asked by clients to provide whole life carbon assessments, up from 14% in the previous year. In addition to this, JLL research showed an 11.6% rental premium for green-certified office stock in London, suggesting that retrofitting of buildings is worth the initial investment.

Industry still lacks a mandate

Under the new Labour government, the Chancellor of the Exchequer Rachel Reeves plans to kickstart green growth by investing in clean energy. However, there are concerns the government is putting all its eggs into one basket. The Autumn Budget’s focus on decarbonisation reflects a promising shift toward clean energy. But it falls short on delivering a comprehensive mandate to measure and report whole life carbon. Aside from supporting the government in its net zero targets, industry leaders argue that such a mandate could drive investment in greener materials and technologies, potentially unlocking further growth in both housebuilding and commercial construction.

In addition to this, the green skills gap remains a significant challenge. According to LinkedIn’s 2024 Green Skills Report, demand for green talent in the UK grew by 46% in the past year – ‘with energy auditor, environmental engineer and solar technician the fastest-growing green titles’. It shows the UK has work to do to ensure it has the pool of talent required to keep up with the demand. Upskilling quantity surveyors and other construction professionals could be essential to help bridge this divide.

Conclusion

As the year draws to a close there are signs of the Middle East conflict de-escalating, with a ceasefire announced in Lebanon at the end of November. However, it remains unclear whether we’ll see a definitive end to the conflict by the start of the new year. It’s also too early to say what effect, if any, Trump’s presidency could have on the UK construction industry; with speculation his policies could influence global economic conditions, trade, and investment.

From ongoing geopolitical tensions in the Middle East to elevated borrowing costs, and tax increases, it’s clear the industry isn’t yet free of inflationary pressure. However, while this year has tested the sector, it’s also demonstrated signs of recovery, as well as its capacity to adapt and grow; especially in the arena of sustainable practices and methods. Indeed, in the absence of a whole life mandate, it’s the construction sector that will continue to take the lead on the latter; driving the reduction of carbon emissions in the built environment through acquiring and verifying data, adopting the updated RICS standard and developing tools to measure and report.

To keep up to date with the latest industry news and insights from BCIS, register for our newsletter here.