Input Costs

Key Inflationary Drivers

Near-term tender price inflation is being moderated by subdued demand, competitive tension and slow pipeline conversion. However, underlying cost pressures — particularly labour, compliance, MEP trades and specialist capacity — remain elevated and are expected to intensify as deferred projects unlock and activity normalises through 2026–27.

MEP cost remains a principal inflationary driver within G&T’s latest forecast. Although headline trade inflation has eased from recent peaks, labour cost growth, elevated trade preliminaries and pockets of constrained specialist capacity continue to exert upward pressure — particularly in heavy-MEP sectors such as health, data centres and major plant replacement. This dynamic is not uniform across the industry - less buoyant sectors, often delivered through Tier 2 supply chains, are experiencing greater competitive tension and leaner overhead structures, which may temper outcomes. Market feedback remains mixed but given the scale and programme rigidity of MEP-intensive schemes, we continue to see MEP as a key inflation risk through 2026–27.

The table below summarises the key inflationary and deflationary forces currently shaping market conditions.

MATERIALS TRENDS

Materials inflation remains subdued but uneven, marking a clear break from the broad-based volatility seen during 2021–22. Headline indicators now point to a return to more typical cost inflation, with the DBT All Work construction materials price index showing prices rising by around 3% year-on-year to November. While prices remain structurally elevated — still over 40% above pre-pandemic levels — they sit below the 2022 peak, indicating a higher but more stable cost base rather than renewed inflationary stress.

Materials prices have broadly plateaued over the past two years. Supply chains are functioning efficiently, with good stock availability, predictable lead times and limited short-term pressure. Softer private-sector demand, particularly in residential and new-build commercial development, has helped rebalance supply, enabling contractors to secure fixed-price material agreements more readily. This assessment is reinforced by commentary from the Construction Leadership Council’s Materials Supply Chain Group, which highlights a shift away from acute product shortages towards conditions where supply often exceeds demand, particularly in housing-led markets.

That said, materials inflation has not disappeared; it has become increasingly trade-specific and policy-sensitive. Energy-intensive and regulated materials remain the key watchpoints. Survey feedback consistently highlights waste, demolition and disposal as the most active material-related pressure point. Tighter sustainability requirements and the scheduled landfill tax uplift from April 2026 are beginning to influence pricing across demolition, groundworks and civils packages. These pressures are incremental rather than acute but are expected to add upward bias over the medium term.

Elsewhere, façades and recladding remain firm, driven less by raw material prices and more by fire-performance requirements, warranty exposure and limited specialist capacity. MEP-heavy packages continue to face structural pressure, particularly in electrical equipment, cabling, lighting and lifts, reflecting high imported content, manufacturing cost inflation and strong global demand linked to electrification and data-centre investment.

Looking ahead, policy and supply-side developments warrant monitoring rather than implying imminent escalation. The UK Carbon Border Adjustment Mechanism from 2027 is expected to reinforce cost pressure in carbon-intensive materials such as steel and cement, though near-term impacts in 2026 are likely to be limited. Constraints on domestic quarrying and cement capacity, alongside exposure to imported components, leave selected packages sensitive to exchange-rate movements and global logistics disruption should demand strengthen.

Overall, the materials landscape has stabilised. While isolated risks remain — particularly in energy-intensive products, imported components and compliance-driven specification — materials are no longer the primary driver of tender price inflation. 

LABOUR TRENDS

The UK construction labour market has eased from the peak tightness seen in 2022–23, but it has not fully normalised. Weaker project conversion, delayed starts and subdued private-sector demand have reduced immediate hiring pressure, making general labour easier to secure than at any point since 2021. However, this softening reflects demand restraint rather than a structural improvement in labour supply. Across much of the market, labour availability appears looser — but fragile.

Pay data reinforces a “cooler, not cheap” dynamic. ONS figures show construction average weekly earnings rising more slowly than the wider economy in late 2025, with year-on-year growth moderating to around 2–3% on a three-month average. This places construction among the weakest sectors for headline wage growth, despite pay levels remaining elevated in absolute terms. The slowdown reflects constrained workloads and cautious hiring rather than an abundance of skilled labour — a distinction that matters for forward pricing.

Industry wage settlements point in the same direction. Summer 2025 agreements under CIJC and BATJIC delivered uplifts in the low-to-mid-3% range, well below the 5–8% settlements common in 2023–24. These outcomes suggest labour cost inflation is easing at an aggregate level. However, they do not eliminate labour-led pressure within tenders, particularly where productivity is constrained, programmes are extended, or specialist trades are required at short notice.

Vacancy data confirms the cooling narrative — but with caveats. Construction vacancies have fallen below their long-run average, largely because firms are delaying recruitment or choosing not to replace leavers. Employment has also declined materially, with ONS data showing construction employment at around 2.05 million in Q3 2025 — over 350,000 below pre-Brexit levels. This reduction has been concentrated among older, experienced workers, exacerbating the loss of skills even as headline labour demand weakens.

As a result, labour pressure has become highly trade- and project-specific. General operatives are more readily available, but specialist and high-integrity skills remain persistently constrained. Survey feedback continues to highlight shortages in MEP, fire and life-safety, façade installation, drylining and infrastructure-linked roles, with contractors increasingly selective about the work they tender based on the labour capacity they can reliably secure.

Looking ahead, the structural picture remains unchanged. The CPA and CITB estimate that the industry will require around 240,000 additional workers over the next five years, driven by infrastructure delivery, energy transition, building-safety remediation and long-term housing targets. While subdued workloads mean labour pressure is manageable in the near term, any sustained acceleration in activity through 2026–27 is likely to re-tighten specialist labour markets from a lower base, re-introducing upward pressure on wages, sub-contractor rates and programme risk — especially in infrastructure, utilities and regulated sectors.

Bottom line: labour cost inflation has eased, but labour risk has not. The market is cooler, but once demand recovers, structural scarcity is likely to be the binding constraint.

ON-COSTS

Main contractor overheads and profit (OH&P) remain broadly stable in percentage terms, with no evidence of a market-wide reset. In Q1 2026, around 80% of respondents reported no change, broadly consistent with Q4 2025. The proportion reporting increases has edged down slightly quarter-on-quarter, while reported reductions remain marginal. This reinforces the view that headline margins are being defended rather than expanded, particularly in competitive or lower-risk workstreams.

Beneath this stable aggregate, selective upward movement persists on mid- to large-scale and higher-risk projects. Survey commentary continues to point to risk pricing, financing costs and management resource constraints as the primary drivers, rather than improved market leverage. By contrast, more standardised or repeat work continues to anchor headline margins, leaving uplift concentrated in schemes with long durations, complex interfaces or heightened compliance exposure.

Preliminaries present a more dynamic picture. In Q1 2026, nearly 38% of respondents reported increases, up modestly from Q4 2025, while reports of reductions remain negligible. This confirms that prelims inflation is proving stickier than OH&P, reflecting longer programmes, higher site management and supervision requirements, rising staff costs, and the cumulative impact of Building Safety Act–related duties and assurance processes.

Importantly, the data suggests a structural rebalancing rather than simple uplift. Many respondents note that headline OH&P percentages are being held flat, while cost recovery is increasingly occurring through preliminaries, package pricing and risk allowances. Several also flagged a trend toward prelim items being pushed down into trade packages, complicating direct like-for-like comparisons but reinforcing the upward pressure on delivered costs.

Looking ahead, expectations remain asymmetric. While most respondents anticipate OH&P remaining broadly flat over the next 12 months, a larger share expects further upward pressure on preliminaries, particularly if programmes lengthen or workloads accelerate in regulated, infrastructure-led and compliance-heavy sectors. Overall, on-costs appear stable at headline level, but embedded delivery costs continue to rise, with preliminaries now the more active inflation channel.