NI rise expected to push construction costs up by 1 per cent
Construction costs will rise by up to 1 per cent due to the increase in National Insurance employer contributions in April next year, according to consultancy Arcadis.
The hike in the rate at which contributions are paid – from 13.8 per cent to 15 per cent – will come alongside a fall in the threshold at which employers start paying NI on an employee’s salary, from £9,100 to £5,000, as announced in chancellor Rachel Reeves’ Autumn Budget.
Arcadis’ UK Construction Market View for winter 2024 predicts that the changes will add between 0.75 per cent and 1 per cent to construction costs.
The timeframe and extent of the impact on particular projects depends on existing contracts and market conditions, the consultancy notes.
Increased NI rates could also incentivise firms to hire self-employed rather than permanent staff because companies do not have to pay their contributions, it adds. While the level of self-employment has fallen by 35 per cent since 2019, the different tax treatment could prompt this trend to reverse.
Last month Glencar chief executive Eddie McGillycuddy criticised the NI increase as “ill-thought-out”, and Seddon’s Nicola Hodkinson told Construction News it was a “slap in the face” for those who employ direct labour. Plant-hire trade bodies also warned that changes to inheritance tax relief could kill their industry.
Meanwhile, although the impact of the 6.7 per cent increase to the National Living Wage will not be felt by contractors too much – as the average sector wage is around £40,000 – it could push material prices up. But builders’ merchants, whose workforces are paid less on average, could be exposed to higher labour costs and might choose to pass them on to the supply chain.
However, the Autumn Budget was a net positive for the construction sector, according to the Arcadis report, largely due to the £100bn boost to capital spending, as well as the reversal of the “implausible and highly damaging cuts in planned investment spending announced by the previous government”.
Tender prices are predicted to rise by between 2.5 per cent and 4.5 per cent for buildings in 2025, and between 4 per cent and 7 per cent for infrastructure.
Arcadis market intelligence lead Ian Goodridge said: “While the construction sector’s fundamentals for growth are sound, the pace of recovery will be hindered by rising costs and diminished project viability on one side, and heightened risk aversion from clients and contractors on the other.
“Despite these challenges, significant opportunities lie in the expanding energy and water sectors, where investment programmes are gaining momentum. With a resilient supply chain and strategic focus, the sector is well-positioned to recover over the medium term.”
From 2025 onwards, the relative prospects for construction markets are likely to diverge further, the report suggests, with the housing market’s slow recovery contrasting with the accelerating investments in energy and water infrastructure.
The Building Safety Regulator’s implementation of planning ‘gateways’ through which projects have to pass is a positive incentive to deliver safe housing, it says, but Arcadis warns that it is also causing the pipeline of high-density residential development to shrink “at an alarming rate”.
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