Construction inflation eases but shortage of workers now the main challenge

Inflation in the construction sector fell below 4 per cent last year as “stabilising material prices, reductions in energy costs and greater competitiveness” eased cost pressures on firms.

A new report by the Society of Chartered Surveyors Ireland (SCSI), however, highlights rising labour costs driven by a shortage of manpower as the main challenge for construction projects.

It also warned that the State’s housing targets, which are due to be revised upwards, will require an additional supply of construction workers.

The SCSI’s report indicated that while construction costs are still rising, the rate of increase eased significantly in the second half of 2023.

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According to the group’s latest tender price index, construction tender prices rose just 1.5 per cent in the second half of 2023, down from 2.4 per cent in previous six months.

That put the annual rate of inflation for the construction sector at 3.9 per cent last year, down from the 11.5 per cent recorded for 2022.

“Two years ago, in the first half of 2022, the index recorded its highest ever six-month inflation rate of 7.5 per cent. So, we are clearly in a much better place now,” SCSI member Kevin Brady said.

“The softening of the rate of increase is due in the main to the stabilisation of the price of building materials, reductions in energy and fuel costs along with greater competitiveness within the market,” he said.

“Reduced demand in some commercial sectors will help increase capacity within the industry for new projects,” he said.

Mr Brady said the society’s members continue to cite financing costs, shortages of skilled labour and rising labour costs as pressing issues.

“Surveyors are consistently reporting the latter as the main driver behind the latest cost increases and the main challenge facing the industry at present,” he said.

“They say labour inflation is being driven by a combination of a shortage of skilled tradespeople and pressure from the cost-of-living crisis which is leading to increasing wage demands,” Mr Brady said.

SCSI president Enda McGuane said the latest report showed that concerted action was needed to address the skills shortage right across the construction sector.

“Given that the Housing for All targets should undergo significant upward revision in the near future, it’s also likely that the number of construction workers required to deliver the higher targets will also have to be revised upwards,” he said.

The SCSI’s tender price index is recorded every six months. The latest reading indicates the inflation rate has been on a downward trajectory for the last 18 months.

It shows some variation across the regions with a higher median rate of inflation of 2.2 per cent recorded in Leinster (excluding Dublin) and 1.5 per cent recorded for Dublin.

Connacht/Ulster recorded a 2 per cent increase while Munster recorded inflation of 1 per cent, down from 3 per cent in the first half of the year.

Central Bank governor Gabriel Makhlouf said on Tuesday that with energy prices falling, labour costs would be the dominant driver of core or underlying inflation in the Irish economy over the next two years.

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