What can we do about rising construction costs?

Tom O’Brien is partner and head of building consultancy at Glenny LLP

Prices have been going up across the board, and with headlines dominated by the rising cost of living and sky-high energy bills, many industries have been feeling the sting.

In the built environment, the BCIS Materials Cost Index estimates that construction material costs have escalated at a massive rate over the past two years, reaching a 40-year high.

Along with higher demand, several global factors are exacerbating the situation, including: supply-chain pressures, and labour and materials shortages driven by the COVID-19 pandemic; transport, storage, delivery and tariff challenges caused by the UK’s exit from the EU; and rising inflation and the war in Ukraine.

Groundworks more expensive

In construction, groundworks costs in particular have grown, having lost their previous duty exemption and now falling under the standard tax rate.

Looking back over the first quarter of 2022, while undertaking tender exercises, we noted cost increases in our industrial projects, as rates across general works items rose by about 2.6 per cent over the period.

In addition, structural steel costs were up 26 per cent and cladding rose by 20 per cent. Reinforced concrete – both in concrete (up 20 per cent) and reinforcement (up 38 per cent), including insulation costs – also saw increases. Meanwhile, bitumen-based road and car-park surfacing rose by 21 per cent.

“Construction costs are set to continue rising. Our forecasts point to an increase of about 2.5 per cent by the end of the year”

While these trends have had a huge effect on decision-making at the highest level, they have not had a great impact on industrial redevelopment opportunities within the core Glenny region as rental values have kept pace with, or exceeded, construction cost increases.

However, this has not been the case outside the Glenny region and development decisions in the wider industry may be affected.

Construction costs need to be considered when analysing other property requirements, such as insurance, and reinstatement cost assessments are vital. It is important for landlords to regularly review building-cost reinstatement values across their portfolios to ensure they are not grossly under- or overinsured in the current market.

With inflation rising, RPI adjustments will start to rebalance these values, but assessments should certainly be undertaken where they have not been reviewed in the last one or two years.

Costs set to increase

Going forward, construction costs are set to continue rising. Our forecasts point to an increase of about 2.5 per cent by the end of the year, with that number likely to be closer to 8.5 per cent by the end of 2023.

A further reason for this is the latest building regulation changes that came into effect on 15 June. There is now significant pressure on developers to adhere to more stringent energy-efficiency rules and targets, as outlined in Part L of the building regulations.

These revisions, which call for non-domestic buildings to cut carbon emissions by 27 per cent to help the UK meet 2050 net-zero goals, are a move towards the Future Buildings Standard due in 2025.

With a focus on energy-efficient materials, improved insulation and a shift towards low-carbon heating systems, the market will see higher costs as it transitions to the new requirements. Planning ahead is therefore an increasingly urgent priority for businesses in the space.

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