Construction costs are a crucial variable in development viability, with fluctuations in material, labour, energy and supply chain costs creating uncertainty for property developers.
Global geopolitical tensions, energy market volatility, supply chain pressures and labour constraints continue to influence construction pricing and project viability. While the industry has become more accustomed to managing change, recent analysis from BCIS suggests that forecasting and benchmarking construction costs is becoming increasingly difficult.
For SME property developers, the challenge is no longer simply dealing with higher costs. It is making confident decisions when costs are harder to predict.
Why are construction costs so unpredictable?
Recent events in the Middle East have once again highlighted how global issues can quickly affect the UK construction sector.
Recent market analysis has highlighted immediate impacts on fuel, logistics and plant costs, alongside potential longer-term effects on energy-intensive materials including cement, concrete, steel, aluminium and glass. Cost increases often move through supply chains at different speeds, making it harder to understand how and when projects may be affected.
This means developers can face a situation where some costs increase almost immediately, while others may not be reflected in quotations, tenders or supplier pricing for several months.
As a result, construction cost planning is becoming more complex than simply applying a standard inflation assumption.
What is driving construction cost uncertainty?
Recent industry research suggests geopolitical events are now considered the biggest threat to construction cost stability over the next year, followed by borrowing costs and labour shortages.
These challenges sit alongside existing pressures including:
- Higher material costs
- Ongoing labour constraints
- Evolving regulatory requirements
- Supply chain disruption
- Changes to environmental and building standards
Many of these factors are interconnected. Energy prices can affect manufacturing costs, transport costs and material availability simultaneously. Changes in interest rates can influence both development viability and contractor confidence.
For developers, the result is a market where pricing assumptions may need to be reviewed more regularly than in previous years. asier to appraise, structure and fund, particularly where timelines and exit strategy are closely aligned.
Why is benchmarking becoming more difficult?
One of the biggest challenges for developers today is that construction benchmarking is becoming significantly more difficult.
Historically, developers could often rely on recent comparable schemes to estimate costs with a reasonable degree of confidence.
BCIS suggests several factors are reducing the reliability of traditional benchmarking approaches:
- Greater variation between similar projects
- Increased importance of procurement timing
- Less consistent market pricing signals
- A weaker link between input costs and final outcomes
- Reduced confidence in single benchmark figures
- The need to make decisions before clear market trends emerge
In practical terms, two similar developments tendered several months apart may now produce materially different cost outcomes.
This does not mean benchmarking is no longer useful. It means developers need to place greater emphasis on context, timing and current market conditions when using comparable projects.
How can SME developers manage construction cost uncertainty?
While uncertainty cannot be eliminated, there are practical steps developers can take to improve project resilience.
Use cost ranges rather than fixed assumptions
One of BCIS’s key recommendations is to place greater emphasis on cost ranges rather than relying on a single benchmark figure.
Rather than assuming a specific build cost will be achieved, developers should consider best-case, expected and higher-cost scenarios during appraisal and planning.
This creates greater visibility around risk and helps avoid viability issues if costs move unexpectedly.
Review appraisals regularly
Development appraisals should be treated as living documents rather than one-off exercises.
Key assumptions should be revisited throughout:
- Site acquisition
- Planning
- Pre-construction
- Procurement
- Build-out
Regular reviews help ensure viability remains aligned with current market conditions.
Engage contractors and suppliers early
BCIS highlights the importance of planning collaboratively and sharing forecasts early across the supply chain.
Developers who engage contractors, consultants and suppliers at an early stage are often better positioned to identify emerging cost pressures before they become significant issues.
Early engagement can also improve procurement planning and reduce exposure to unexpected price movements.
Protect contingency budgets
Contingencies have become increasingly important in a market where cost movements are harder to predict.
Reducing contingency allowances to improve headline profitability can leave projects exposed if market conditions change during delivery.
Appropriate contingencies should be considered – we would typically expect 10% in times of uncertainty – alongside realistic build cost assumptions and programme allowances.
Focus on flexibility
Projects that retain some flexibility during delivery are often better able to absorb cost pressures.
This may include:
- Alternative material specifications
- Phased delivery approaches
- Procurement flexibility
- Programme adjustments where appropriate
The ability to adapt can be just as important as the accuracy of the original appraisal. c, they can represent attractive development opportunities with clear planning parameters.
What does this mean for development viability?
Construction costs remain a key component of development viability, but the wider challenge today is uncertainty rather than inflation alone.
The most successful developers are rarely those who predict every cost movement perfectly.
Instead, they are often the developers who:
- Stress test assumptions
- Monitor viability regularly
- Build realistic contingencies
- Use reliable market data
- Adapt quickly as conditions change
Increasingly, developers are having to make decisions before clear market trends emerge. That means judgement, experience and ongoing monitoring are becoming more important parts of the development process.
Construction cost uncertainty is likely to remain
While the long-term outlook for development remains positive, developers should expect continued volatility in areas such as energy, materials, logistics and labour.
The good news is that uncertainty does not necessarily prevent viable projects from moving forward.
Developers who plan carefully, benchmark intelligently and maintain flexibility throughout the development lifecycle are likely to be best placed to navigate changing market conditions and deliver successful schemes.
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