More warnings over impact of Budget as Arcadis says tax hikes will heap further cost onto projects

Arcadis has issued the latest warning about the impact of the Budget on construction costs with the consultant saying the National Insurance hike could add an extra 1% to budgets.

It said the rises, due to come into force next April, could raise project costs by between 0.75% and 1%.

Last week, the S&P Global UK Construction Purchasing Mangers’ Index said the impact of tax rises announced by chancellor Rachel Reeves in the October Budget meant optimism about the sector’s outlook was at its lowest level for more than a year.

Now Arcadis has added its name to the list of those concerned about the tax hikes, warning the Budget was a mixed bag for the industry.

“The positive impact of a £100bn boost in capital spending was blunted by increased business costs related to the National Living Wage and employers’ National Insurance Contributions (NICs),” it said. “This will add to headwinds, which include a potential slowdown in the pace of interest rate cuts in 2025.”

It added: “Additional costs associated with directly employed labour will add 0.75% to 1% to construction costs. The timing and extent to which these costs are passed through on projects will depend on existing contracts and market conditions.”

And it added the living wage and NIC rises would also affect the price of materials as suppliers looked to recoup the hikes and warned about the impact on smaller firms. “Construction is reliant on micro-businesses and reforms to the Employment Allowance combined with NIC threshold changes could act as a disincentive to business expansion.”

Arcadis said that inflation, escalating costs and regulatory complexities meant it had pushed back the timing of what it called a full recovery by a year to 2026.

Ian Goodridge, market intelligence lead at Arcadis, 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.”

Arcadis said that next year’s tender price forecasts had been updated to 2.5%-4.5% for buildings and 4%-7% for infrastructure.