Movement in contractors’ construction costs in Scotland

Construction input costs in Scotland increased by an average of 5% in the year to 3Q2024, according to a contractors’ panel newly 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 and pipeline expectations

The panel said appetite to tender for contractors is largely dependent on the type of tender, but that a good number of projects are still coming through. Visibility of the pipeline beyond the next few months, however, is not as clear at the moment.

While the Construction Pipeline Forecast Tool is designed to help give firms foresight of upcoming work, it can only be completed according to the best knowledge of the authorities. There is currently uncertainty about budgets and some projects have been delayed, cancelled or withdrawn as clients look to get sign-off or have to reprioritise work.

Input costs

Panellists reported differential cost movement between mechanical and electrical (M&E) work and building work, with M&E costs rising faster. The limited availability of sprinkler specialists as well as increased design costs were cited as particularly problematic, especially now sprinklers are required in some housing. The reliance of the electrical sector on imported materials, with around 90% of products coming from Europe and further afield, was also highlighted as a potential challenge due to the ongoing risk of disruptions to deliveries due to geopolitical events.

Skills shortages

Difficulties recruiting and retaining labour across trades was highlighted as an ongoing issue. Panellists described a ‘perfect storm’ created by a combination of issues around qualifications, college training and recent college strikes, again particularly affecting M&E work.

Problems recruiting more workers to the industry are exacerbated by a declining birth rate in Scotland and cuts to grants by government. Panellists commented that subcontractors operate on such tight margins, they don’t necessarily have the scope to think about training rather than just bringing in the skills they need on projects.

Logistics challenges

Shifting expectations onto contractors to take on design elements has cost and risk implications, particularly when design and budget don’t quite align. Panellists said there has been a growing tendency for clients to push more onto the contractor, sometimes with the expectation that they won’t have to pay for extra work. While some of the cost of this can be absorbed, some has to be passed on through the supply chain.

Panellists also outlined how projects now tend to take much longer to deliver than they did pre-pandemic, with both the pre-construction and build phases extending. Longer build times were largely attributed to changes in working patterns, what has essentially become a four-day working week, since COVID, with work on site not across as many hours in the day or week. The logistics of transporting workers to more remote areas of Scotland also limits available work time and increases costs.

Uncertainty around government policies

The panel outlined ways in which changes in government policy, particularly around net zero targets, have led to a change in attitudes. With funding for grants withdrawn or pushed back, businesses which would have been committed to training in new technologies, and preparing themselves for installations, are now reluctant to train operatives, for example in solar PV and battery storage, or electric vehicle charge point installation.

Uncertainty on rent caps is also proving to be an issue for investors/funders in the residential sector, which has seen projects delayed. Since investors can’t identify what rent increases are going to be permitted, a lot have been questioning whether or not they want to invest in this market until they know what’s going on. As such, some residential projects have stalled and many build to rent schemes over the last year or two have been pulled.

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

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