Movement in contractors’ construction costs in Scotland

Construction input costs in Scotland increased by an average of 4% in the year to 4Q2024, according to a contractors’ panel established by the Building Cost Information Service (BCIS).

The BCIS Scottish Contractors Panel was formed to help monitor quarterly movement in costs, i.e. the prices agreed between the main contractor and suppliers and subcontractors. Comprised of representatives of major contractors in Scotland, it also provides insights on the factors affecting costs on construction projects.

Appetite to tender

Panellists reported a fairly even appetite from subcontractors to tender for work, with nobody saying subcontractors are very eager or that they couldn’t get anybody to tender.

In terms of their own appetite to tender, the contractors said that they are selective on the basis of risk profile and the procurement route, as well as the maturity of design information.

Pipeline of projects

Panellists reported a fairly even spread on their anticipated pipeline of projects when comparing the next 12 months with the previous 12 months.

There were comments that the pipeline in Scotland is quite segmented and dependent on which frameworks and routes to market you’re in. While some contractors may see spikes, others might see nothing coming out at the moment.

Panellists also reported that there’s not necessarily a lack of work to bid on, but a lack of visibility of the pipeline is an issue. As well as public sector organisations not always logging projects on the Construction Pipeline Forecast Tool in a timely fashion, panellists said consultants don’t seem to have as long a view of what’s coming down the pipeline as they did a year or two ago.

Logistics challenges

Among the logistics challenges reported by panellists were tenders being issued with poor quality of information, tight tender periods, and a lack of response to further requests for information or clarification.

Significant concerns remain around recruitment in the industry with an aging workforce, declining birth rate in Scotland, and some sectors struggling to recruit apprentices. Panellists commented that labour shortages are only going to become more pronounced going forward, unless there’s a significant change in the workforce makeup, and that’s a difficult thing to change in a few years.

They said it’s not just about recruiting operatives, but also ensuring organisations are able to grow to work at greater scale. For example, on an M&E package above £7/8 million, the number of capable organisations in the market shrinks to two or three.

Brexit has compounded issues with workers moving back to Europe. However, it was never as significant as it was in England and the Scottish industry has mostly been a homegrown pool.

Labour costs after Autumn Budget

An acceleration of wage increases in the electrical sector, and likely other sectors, is anticipated over the next few years. Increasing apprentice rates has the knock-on effect of qualified electrician’s rates being renegotiated upwards. The same applies when the lower rates are pushed up by increases to the National Minimum Wage and National Living Wage.

Contractors are still working out what the impact of the increased employers National Insurance contribution will be. Panellists commented it will potentially have an impact on recruitment of staff and apprentices into next year. They said where contracts don’t have fluctuation clauses, firms will have to review contracts to see if it’s possible to recover the additional cost.

In the immediate term, panellists said the supply chain will get projects over the line and probably absorb the impact, but bidding for contracts for delivery in 6/9 months’ time will have to reflect the increase.

Differential cost movement

Panellists reported they continue to experience differential movement between mechanical and electrical (M&E) work and building work. There was a suggestion that M&E package rates are double what they were a few years ago and budgets haven’t moved to accommodate these changes. This is in large part due to the increased costs associated with meeting new government regulations and sustainability targets. This includes, for example, the cost of extra supervision to ensure the required quality standards are met. This has required extended programmes, which increases costs.

Panellists agreed that it’s not an unrealistic prices issue, rather they are dealing with unrealistic budgets.

Among the panellists who experienced differential cost movement between regions, there was a comment that skills shortages and the availability of labour and specialist subcontractors in the north and northeast of Scotland are having more of an impact on costs than in the central belt.

Those experiencing differential movement between projects of different size said that smaller projects incur higher costs, including because supply chain selection is narrowing to avoid the risk of insolvency.

Sharing the risk

The contractors reported their risk is not being shared with the client and that they take the full risk, though there was a comment that they will not take on additional risk above market norms.

Providing programmes to the supply chain for them to price for risk reduces the contractor risk profile, but pushes up costs. Risk registers are developed so that risk holders fully understand their position.

One panellist commented that because there has been an upsurge in supply chain insolvencies, they have further restricted the list of suppliers and subcontractors they request to bid for projects, which has put pressure on those companies to return their submission on time as they are receiving more enquiries.

Panellists said they didn’t believe the industry has yet seen the full impact of the ISG collapse and are anticipating a bigger effect on the supply chain.

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Panel members:

• Stuart Parker, Morgan Sindall
• Garry Shand, Hutcheon Services
• Brian McQuade, Robertson Group
• Alan Wilson, SELECT
• Iain Tosh, Morrison Construction
• Martin Poole, Ogilvie Construction
• Paul Dodd, Scottish Futures Trust