Construction Intelligence Report Q4 2024

AtkinsRéalis has published its Construction Intelligence Report for Q4 2024, with a range of analysis and insight into the sector in the PDF below. Here Max Wilkes, associate director for project and programme services, sets out his forecast for construction looking ahead to 2025.

In the previous Construction Intelligence Report forecast, we increased our prediction by 0.25% for the rest of the year. The resultant figures released on input and output prices and construction output gives us confidence in the level of forecast.

For 2025 there is growing optimism that output and investment will continue to rise. Historically, as output rises so does inflation, which our tender price forecast reflects with increases for the next three to four years as increased demand will drive inflationary pressures.

The question is, how will the pre-eminent cost drivers influence tender prices?

Construction output will be limited, as planning delays continue to blight schemes due to lack of planning resources and poor direction. As a result, developments are taking longer to get to site. These are issues that the government intends to address.

The procurement of more planning resources will take time, and other supply chain constraints such as labour shortages and a reduction in suitable contractors will limit the total increase in construction output.

As a result, continued interaction with the supply chain is essential. The last few years have left contractors scarred and a period of retrenchment has commenced as they pulled out of certain market sectors; for example, moving away from high-rise residential to focus on other areas.

Contractors are reevaluating their major areas of work, looking for increased margins and the potential for future work on similar schemes. Pre Covid, contractors may have appeared interested in tendering but are now less likely to, especially when working with an unfamiliar supply chain.

The withdrawal of Lendlease from all markets except their Australia homeland came as a surprise to many within the UK construction sector. In practical terms it also reduces the list of Tier 1 contractors available for large complex buildings. As a result, Tier 2 contractors are being approached to undertake work, but there is uncertainty around their ability to deliver the projects. Although no Tier 1 contractors have gone into administration since Carillion, the same cannot be said of Tier 2 /regional contractors and specialist installers. The figures are stark: 17% of all UK insolvencies in the last year were from construction.

The specialist installers are especially affected, accounting for over 60% of construction administrations. Although alternative sources of contractors and subcontractors can be found in larger metropolitan areas, this may bring risk, in quality, cost or time.

Outside of the larger markets, the lack of resource becomes especially noticeable, with traditional tender lists decimated because of the demise of established contractors. There are early signs that inflationary pressures are beginning to commence; the supply chain is more limited than a few years ago and this reduces the previous competitive edge. Contractors and specialist sub-contractors are pushing back against designing parts of the project with incomplete or conflicting information, resulting in refusal to tender or increased tenders sums to cover risks.

We advise clients to avoid additional costs and delays by providing early and detailed information. There is still downward pressure. Recent government statements on the shortfall in funding promises were followed by cancellation of several infrastructure works and announcements that ‘things will get worse before they get better.’ We have been warned to expect tax rises and this raises concern over their spending plans . There is a nervousness about the path that the government will follow, but they are certainly retaining tight control of spending limits and this is unlikely to change in the October budget.

With many analysts stating that the next economic cycle will be fuelled by private investment, there are fears of tax increases and other unwelcome news. These pose some threats that may deter or limit the immediate amount of private investment available.

For contractors still looking to complete their order books for 2025, a smaller than anticipated pipeline of opportunities will force a continuation of competitive tender bids.

Our forecast remains positive; it allows for an increase in output, along the lines forecast by the industry and accommodating a degree of planning reforms and a slight increase in the labour force.

The government is taking a more active and interventional approach to projects, whether housing or infrastructure.

Looking further ahead, if the planning reforms are successful and quickly implemented, the usual scramble for resources may occur, leading to potentially higher tender increases and delays. As always, we recommend early and good communication with all members of the supply chain to achieve the best results.