Why are construction input costs outpacing tender prices and how long will the gap hold?

Construction input costs are rising faster than tender prices. Dr David Crosthwaite, BCIS chief economist, examines the factors shaping this relationship and how long it could persist.

Construction costs are rising faster than tender prices, as weak demand and strong competition for work limit contractors’ ability to pass on higher costs to clients. A number of factors, including hostilities in the Middle East, are holding the gap, placing greater emphasis on using the latest data when reviewing early cost assumptions.

It is normal for tender prices to lag changes in input costs. Contractors do not automatically pass on movements in labour, plant and materials costs in bids, and the extent to which they do depends on market conditions, order books and business objectives.

Official data and industry commentary suggest tender price growth is currently muted, despite higher materials and fuel costs. The BCIS All-in Tender Price Index, which measures the trend of contractors’ pricing levels in accepted tenders, rose by 3.2% in the year to 3Q2026. Meanwhile, the BCIS General Building Cost Index, which measures cost movements in a basket of construction inputs, is forecast to rise by 4.5% over the same period.

Weak demand is contributing to the gap. Total construction output in Great Britain was down by 2.5% in July 2026 compared with a year earlier, with declines across most new work sectors, including public housing, down by 22.2%, and private industrial, down by 8.7%.

S&P Global’s August construction survey, published in September, also highlighted contractions across the residential, commercial and civil engineering sectors. Respondents cited greater risk aversion following the Middle East conflict and delays in client decision making.

This perspective was partially reflected at the latest meeting of the BCIS Tender Price Index Panel. The panel outlined how residential demand, particularly in the private sector, is limited, while investors and developers remain cautious about progressing new Grade A commercial developments in regions outside London.

While stronger opportunities were noted in data centres, utilities and the commercial refurbishment and cut-and-carve markets, reduced pipelines have amplified competition for work, offsetting greater tender price growth. More than three-quarters of the panel cited contractors as eager to tender in 3Q2026, compared with 60% in the second quarter. For clients with viable schemes and funding in place, relatively restrained tender price growth may provide an opportunity to progress. The decision will still depend on financing costs, project requirements and the availability of suitable contractors.

When will higher costs feed through to tender prices?

It is likely softer tender price growth will persist as uncertainty arising from the Middle East conflict tempers improvements in demand. The US and Iran continue to trade threats, while developments around strategic shipping routes have complicated the outlook. Amid persistent energy price volatility, higher borrowing costs and low investment appetite and confidence, the construction industry faces the prospect of continued supply- and demand-side constraints into 2027.

The question is not simply how long these conditions will hold, but if and when construction businesses will be forced to pass on cost pressures to a greater extent.

In the first BCIS TPI Panel meeting of the year in March, just over a week after the conflict broke out, members suggested it could be up to six months before inflationary pressures were priced in.

Some evidence points to this. The BCIS All-in Tender Price Index rose more sharply in the year to 3Q2026 than the 2.5% increase estimated in the 12 months to 3Q2025, although the impact of the conflict cannot be isolated from other factors.

However, recent increases in tender prices remain well below levels seen during the energy shock in 2022 following the Russian invasion of Ukraine. In fact, annual percentage growth in the BCIS All-in TPI has not exceeded 4% since 2023, suggesting contractors are still absorbing some of the extra cost, and that input cost pressures are feeding through unevenly.

Sustained conflict and changes to government policy and spending commitments may disrupt this pattern and put more pressure on contractors to increase tender prices.

For example, the introduction of the UK Carbon Border Adjustment Mechanism (CBAM) in January, which will apply a carbon tax to certain imports, including iron and steel, cement and aluminium products, is expected to add cost pressure in some areas. The BCIS TPI Panel reported that price spikes for steel packages had already been observed ahead of the EU CBAM and changes to UK steel import quotas and tariffs in July.

The Autumn Budget could influence demand and pricing in either direction. Government borrowing costs and competing spending priorities, including defence, will shape decisions on public investment and determine which projects move forward. If more projects progress, workloads could strengthen, reducing available market capacity and increasing upward pressure on tender prices. Conversely, project deferrals or shifts in spending priorities could weaken demand, prolong competition for available work and constrain price growth.

Financing conditions will also remain important. If borrowing costs remain elevated, they could continue to constrain scheme viability, even where competitive tender pricing helps contain construction costs.

Where are the greatest cost pressures?

Ultimately, much depends on project exposure. Tender pricing can vary considerably across regions, procurement types and sectors.

Large, complex projects, those using the preferred two-stage tendering and those with particular exposure to energy-intensive materials, using heavy plant or mechanical, electrical and plumbing (MEP) specialists could carry greater risk of price increases. MEP is a particular concern, as data centre construction and the New Hospital Programme are reportedly absorbing capacity while specialist staff remain difficult to recruit and retain.

For now, competition for available work appears to be limiting contractors’ ability to pass higher input costs through to tender prices. However, if underlying cost pressures remain they could feed through more strongly as market conditions improve, meaning contractors will face increasingly difficult decisions over how much cost they can absorb.

BCIS TPI Panel commentary suggests insolvencies in the construction industry, particularly among mechanical and electrical (M&E) subcontractors, pose a significant risk to project delivery. Monthly insolvencies dropped to 294 in August but given the wider macroeconomic context, this is no guarantee of a decline and it’s likely the industry’s resilience will continue to be tested.

For clients and cost professionals, current conditions reinforce the importance of using the latest and most relevant cost information when testing feasibility and setting budgets. Those capturing the nuances of project costs will ultimately be better placed to manage risk, whether the cost-price gap widens, holds or narrows.

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