Why can cost volatility complicate benchmarking?

Cost volatility can make traditional benchmarking processes less straightforward. BCIS data services director Karl Horton explores the key challenges facing construction professionals as changing market conditions complicate the interpretation, comparison and forecasting of projects costs. 

Despite the apparent easing of tensions between the US and Iran, cost volatility may persist as the effects of the conflict continue to work their way through supply chains. In this environment, benchmarking project costs can be more complex, particularly where programmes rely on imported or energy-intensive materials and products.

BCIS polling of more than 300 construction professionals in late April found that the vast majority – 98% – considered benchmarking either ‘moderately challenging’ or ‘very challenging’ under current market conditions.

One of the main issues is having to make decisions with lagged data, a concern more than half (53%) of BCIS poll respondents identified.

The challenge is not simply cost or price increases, but the difficulty in evidencing market movement before it is shown in official data and indices.

Trends recorded in previous periods of volatility following Russia’s invasion of Ukraine and the Red Sea attacks may offer useful context if building costs follow a similar pattern. However, cost movements are rarely uniform and differences in the economic and market conditions shaping each event may limit the value of direct comparisons between benchmark projects.

For example, after Russia’s invasion of Ukraine, sharp increases in input costs coincided with strong construction demand, which is likely to have amplified the rise in tender prices, as reflected in the BCIS Tender Price Index. By contrast, the cost pressures reported to date from the conflict in the Middle East have emerged against a weaker demand backdrop. As a result, any upward impact on tender prices may be more subdued, particularly if heightened competition for work and less robust contractor pipelines limit contractors’ ability to pass on higher costs. This may reduce the comparability of otherwise similar projects delivered during the two periods.

Timing is another challenge when benchmarking during periods of cost volatility. Even small differences in when projects are procured can lead to significant price variations. For example, projects tendered only a few months apart may experience different supply chain pressures or contractor risk allowances.

During periods of conflict-driven cost volatility, these variations can become particularly pronounced because geopolitical events may change rapidly, with impacts moving through markets and supply chains at different speeds.

Reduced clarity in market signals poses another challenge for benchmarking. Tender pricing behaviour may become less consistent because contractors respond differently to uncertainty depending on workload, pipeline security, cash flow pressures and appetite for risk. This can make current trends harder to identify, account for in comparisons and respond to.

Half of respondents in the BCIS poll identified inconsistent market signals as one of the main benchmarking challenges, while 43% cited timing differences. With Bank Rate unchanged at 3.75% in June and inflation expected to rise again later this year, pricing behaviour may remain volatile as businesses respond to evolving supply costs, wage pressures and wider cost-of-living increases.

An unpredictable relationship between cost drivers and tender outcomes is another issue. Cost pressures can move through the supply chain at different speeds, which means project pricing may reflect a combination of past and current market conditions. This can make it more difficult to isolate the causes of cost movements and lead to increased reliance on professional judgement when interpreting benchmarks and applying adjustments.

All of these factors can complicate benchmarking and make it harder to narrow a cost range even when more project information becomes available. Assumptions of consistency between comparable schemes can become less reliable, particularly where procurement timing or supply exposure differ.

In these conditions, benchmarking is less about identifying one definitive cost position and more about understanding the range of possible outcomes and the factors influencing them. Context, timing and interpretation become as important as the underlying data itself.

For cost consultants and project teams, this places greater emphasis on professional judgement, scenario testing and transparent risk assessment. Benchmarks remain an essential tool, but their value increasingly lies in helping clients to understand the implications of volatility and make informed decisions in a market where conditions can change rapidly and unevenly.

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