Construction inflation: reflecting reality with project cost data

Virtual reality headsets, men’s walking boots and mangoes. What do they have in common? 

They’re among the latest additions to the Office for National Statistics’s (ONS) basket of goods and services used to calculate general inflation. On their way out – DVD rentals, newspaper adverts and oven-ready gammon joints. A realistic reflection of the way the world is moving perhaps, but there’s something crucial to remember about all of these items.

None of them have anything to do with construction, or the real-world costs construction professionals deal with every day.

And yet indices like the Consumer Prices Index (CPI) and Retail Prices Index (RPI), which track such items, continue to be used to gauge movement in prices for construction projects, an approach that can lead to significant gaps between budgets and actual outturn costs.

At present, inflation is relatively benign when viewed in the context of the last few years. CPI inflation was at 2.6% in March, down significantly from its peak of 11.1% in October 2022. Construction inflation is running slightly lower; the BCIS General Building Cost Index, which combines labour, plant and materials costs is forecast to have been 2.3% in March, though increased payroll costs from April are set to increase annual construction inflation to around 3.5%.

At a simplistic level, the difference between budgeting for inflation at 2.6% using CPI, instead of 2.3% using a construction specific metric, on a £10 million project is a £30,000 overestimate. With construction inflation at 3.5%, it’s a £90,000 underestimate against inflation measured using CPI. Enough to take a hefty chunk out of a project’s contingency.

When we look at specific materials or work activities, though, we see huge divergence. Depending on the composition of a project, the difference between inflation on the component resources and general inflation can become far more pronounced.

To take a few examples from BCIS’s Price Adjustment Formulae Indices for Civil Engineering, which track costs for specific work activities, Aggregates prices were 21.6% higher in April 2023 than in April 2022, and 12.2% lower in April 2024 than in April 2023.

Bricks and clay products saw annual inflation of over 26% in August 2023, while metal sections decreased by an average of 32% in the same period.

Karl Horton, Head of Data Services at BCIS, said: ‘Underestimating can derail delivery and overestimating can price a project out of contention, which is why construction-specific indices are such essential tools.

‘It may be tempting when construction inflation is at a similar level to general inflation to rely on broad economic metrics, but what’s really important is to consider the specific make-up of a project, and where the greatest cost drivers lie.

‘Whether we’re in a time of rampant inflation and elevated uncertainty or relative calm, clients expect cost advice to be evidence-based. In a competitive market, cost experts must be able to explain not just what has changed, but why. A general inflation figure does not carry the same weight as a sector-specific index. After all, no one ever planned a new hospital using the price of mangoes.’

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