Building costs are forecast to increase by 13.1% over the next five years, while tender prices are expected to rise by 15.5% over the same period, according to the latest construction forecast data from the Building Cost Information Service (BCIS).
Total new work output is forecast to contract by 2.7% this year before returning to modest growth from 2027 onwards.
Dr David Crosthwaite, Chief Economist at BCIS, said: "Rising energy and materials costs are creating renewed inflationary pressure across the construction supply chain, but weak demand remains the dominant force in the market.
"Contractors continue to face competitive conditions, limiting the extent to which higher costs can be reflected in tender prices. Although activity is expected to recover over the forecast period, the recovery is likely to be gradual, with significant uncertainty remaining around both costs and demand."
The BCIS All-in Tender Price Index (TPI), which measures the trend of contractors' pricing levels in accepted tenders, i.e. the cost to client at commit to build, saw annual growth of 3.2% in 2Q2026.
Dr Crosthwaite said: "The BCIS TPI Panel reported that low activity levels are offsetting the inflationary pressures on input costs, with any price increases arising from recent geopolitical developments expected to materialise later rather than immediately."
BCIS forecasts TPI to grow by 2.9% by the end of this year, and by 15.5% over the five years to 2Q2031.
On the input costs side, the BCIS General Building Cost Index (GBCI) increased by 1.4% between 1Q2026 and 2Q2026, resulting in annual growth of 3.8%. Materials cost inflation has gathered pace during the Middle East conflict, with Brent crude prices consistently exceeding $100 per barrel over recent months and driving up costs for energy-intensive materials. Although a ceasefire has since brought prices down from those elevated levels, the situation remains precarious, and any sustained easing would be expected to move gradually through supply chains. The GBCI is forecast to rise by 13.1% over the five-year period.
Dr Crosthwaite added: "At the start of 2026, markets were anticipating two interest rate cuts this year. Expectations have since shifted, with cuts now off the table and a hike a possibility. For a sector where financing conditions shape both development decisions and project viability, that represents a significant change in the outlook in a short space of time."
