The construction industry is an essential part of real estate markets around the world, whether building new homes and offices, new infrastructure, or refurbishing existing buildings to higher standards, but a collection of challenges are making project delivery tricky in most markets.

A decreasing, ageing workforce and diminishing skills has been a factor for some time, but this has been joined in the last five years by higher costs of construction finance, accelerating build costs, and some logistical and regulatory headwinds. But the construction industry – one of the world’s oldest professions – is adapting to meet this latest round of challenges.

BUILD COSTS INFLATION

While much of the world has experienced inflation over the period since 2020, first driven by pandemic-related supply chain issues, then accelerated by the war in Ukraine, build cost inflation has been higher than in many other sectors. Our analysis shows that in nine major economies, build costs consistently outpaced consumer price index (CPI) inflation between 2020 and 2024 (chart below). Although the gap has subsequently narrowed, it still persists, as contractors seek to recover margins.

But not all of the cost increases are due to inflation: in many locations, construction projects are increasingly higher quality, to respond to market demand, and require a higher-spec and more technical fit-out, which inherently pushes up prices.

Generally, the industry has to adapt to a new normal of higher costs, as it’s unlikely we’re going to see disinflation to return them to previous levels any time soon. The best ways to mitigate costs comes in the planning stages. Using Building Information Modelling (BIM), not just on large projects but those of a smaller scale to generate efficient designs, can detect potential problems and reduce waste, while bringing in contractors early ideally through a formal early contractor involvement (ECI) process – can scope and de-risk projects during planning and procurement. The ECI stages should allow developer and contractor to agree their construction methodology, saving both time and more accurate pricing, reducing cost increases mid-way through a build.

LABOUR AND SKILLS

In terms of labour and skills, while the picture is not globally uniform, again construction labour costs have risen sharply, especially for complex infrastructure and technical projects, such as data centres, which require technical expertise, as young workers choose careers in alternative industries. While on the surface it may seem that some developing economies have better labour availability, some of these locations see seasonal fluctuations in the number of workers. While attracting and upskilling workers remains key, using technology to mitigate some of the productivity challenges will help: more advanced use of modern methods of construction (MMC) can reduce the number of man hours required on site, as well as bringing with it cost and environmental benefits.

SEIZING THE OPPORTUNITY

Even against an uncertain economic backdrop, demand in many areas remains strong. That means there are opportunities for firms that can navigate project viability challenges. One such opportunity stems from a shortage of prime office supply in many top tier global cities. Landlords can use renewals or re-lets as a chance to improve their buildings to meet higher environmental and wellbeing standards. This will attract higher rents, helping to offset the cost of delivery.

While the myriad of challenges in the construction industry will remain, careful planning, making full use of technology and being adaptable will enable firms to continue to deliver the crucial new schemes and projects the world needs.

FURTHER INFORMATION

Contact Paul Tostevin or Simon Collett

Financing, costs and skills: how can construction rise to the challenge?