Construction Cost Inflation: What's Next for 2026?

10 May 2026 · 5 min read · Cost Trends

After the volatility of the early 2020s, construction cost inflation is settling into a new equilibrium — but that equilibrium is higher than the pre-pandemic baseline. BCIS forecasts building costs to rise 15% over the next five years, with tender prices tracking even higher at 17%. For cost consultants and developers, the message is clear: the era of flat or falling construction costs is behind us.

Where We Are Now

The BCIS Tender Price Index grew 2.5% in Q4 2025, continuing the steady upward trajectory that began in mid-2023. Materials inflation has stabilised after the supply chain disruptions of 2021–2023, but stabilisation doesn't mean reversal — prices have settled at a permanently higher plateau.

What's driving continued cost growth is no longer materials. It's labour. Both blue-collar trade rates and white-collar professional salaries are rising in response to the structural workforce shortage. This is a slower, stickier form of inflation than the commodity-driven spikes of recent years, and it's less responsive to interest rate changes.

The composition of inflation has shifted. Materials have stabilised; labour has not. For cost planning purposes, that means the bulk of future cost pressure is embedded in the workforce — and there's no quick fix.

Materials: Calm on the Surface

Global supply chains have largely normalised, and general construction materials — concrete, aggregates, timber, plasterboard — are seeing modest, predictable inflation of 2–4% annually. However, energy-intensive products remain volatile:

• Steel — subject to global demand fluctuations, carbon pricing mechanisms, and trade tariffs. Structural steel prices saw 8% intra-year volatility in 2025.
• Cement — production constraints and decarbonisation investment are keeping cement prices elevated. Concrete producers are passing through carbon costs.
• Glass — high-energy manufacturing leaves glazing prices sensitive to wholesale energy markets, which remain unpredictable.

The Interest Rate Effect

Bank of England rate cuts through 2025 and into 2026 should gradually improve investor confidence, unlocking schemes that were paused when borrowing costs peaked. ONS construction output data for early 2026 shows the first signs of this — a 2.8% output growth forecast for the year, driven primarily by infrastructure and housing.

More activity means more demand for the same constrained labour pool. The risk is that a recovery in demand collides with the structural labour shortage, pushing trade rates higher than the BCIS baseline forecasts suggest.

Sector Divergence

Cost trends are not uniform across sectors:

• Infrastructure — strong pipeline from government capital programmes (HS2 phase elements, road and rail maintenance, water industry investment). Labour demand will be intense.
• Housing — recovery underway as mortgage affordability improves. Volume housebuilders are increasing output, absorbing bricklayer and carpenter capacity.
• Commercial fit-out — softer demand as hybrid working patterns persist and office refurbishment cycles slow. Relative respite here, but it won't last if office-to-residential conversions accelerate.

Practical Steps Now

1. Refresh cost benchmarks — if your benchmark library predates mid-2025, it understates current pricing. Re-baseline using recent tender returns and BCIS data, adjusted for trade-specific inflation.
2. Review contingency percentages — the standard 5–10% contingency may be inadequate for schemes with high labour content or exposure to volatile material packages. Consider trade-level risk allowances rather than a single blended percentage.
3. Time procurement carefully — tendering into a rising market means earlier procurement locks in better pricing. For pipeline schemes, consider advancing package procurement where possible.
4. Lock in subcontract prices early — with trade rates rising 5–7% annually, the gap between budget and tender can be significant. Early single-stage negotiation on critical packages reduces this exposure.
5. Stress-test appraisals — model the impact of cost inflation on scheme viability over the development period. A scheme that works at today's costs may not work at costs 12 months into construction. Apply inflation to the cash flow, not just the baseline.

Sources: BCIS cost and tender price forecasts (2026); NorthEight Q1 2026 market analysis; ONS construction output statistics (Q1 2026); BCIS Tender Price Index Q4 2025. This article is for general guidance only.