CONTEXT

Construction output costs

Author: Barrett Harris, Senior Economic Analyst

Construction output costs have stabilised over the past year. However, this masks a fundamental shift in pricing dynamics, with costs increasingly shaped by labour constraints, sector-specific demand and risk pricing behaviour rather than broad-based material inflation.

TRENDS

Cost escalation

Global construction cost inflation slightly increased from 4.2% in 2024 to 4.5% in 2026. Asia recorded an average cost escalation of approximately 3.1%, however there is variation between markets. China has softer inflation while India’s rate is much greater, driven by investment activity.

Across regions with similarly mature construction markets, price escalation levels are similar:

North America

ANZ

Europe

While headline escalation appears stable, the underlying drivers have shifted. Inflation is increasingly driven by:

Labour availability and wage pressure

Sector-specific demand intensity

Contractor capacity constraints

Risk allowances linked to uncertainty

Looking ahead, escalation is expected to remain broadly in line with current levels in the near term. However, upside risks are increasing, particularly in response to energy price volatility and geopolitical uncertainty.

This creates a more complex forecasting environment. While systemic disruption is not expected, the range of potential outcomes is widening, making escalation more sensitive to local market conditions.

PRICING

Preliminary costs and OH&P

Margins and preliminaries have increased modestly, reflecting greater caution and risk. Data collected in early 2026 coincided with heightened geopolitical uncertainty, contributing to the inclusion of higher risk allowances within contractor pricing.

Prelims and OH&P small build

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Prelims and OH&P large build

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Beneath this trend there are pronounced differences between sectors:

Data centres report the highest margins globally at 27.0 percent
Corporate occupier projects follow with 23.0 percent

These elevated margins reflect:

Technical complexity
Intensive servicing and commissioning requirements
Limited contractor capability
Strong and time-sensitive demand

In contrast, traditional sectors such as residential, commercial office and retail still have lower margins, supported by more balanced capacity and stronger competition.

"Margin behaviour indicates a shift in pricing strategy. Contractors are increasingly pricing for risk, complexity and capacity constraints, rather than simple competition."

Assessing current tendering conditions and anticipating future shifts provides critical insight into the construction market cycle and serves as a key indicator of potential cost inflation.

Tendering conditions have been assessed on a scale from 1 to 5, reflecting the level of competition within the market. By evaluating tendering competitiveness, we can gain insights into the overall market activity and potential impacts on construction costs.

MARKET

Current tendering conditions

Limited competition

When there are very few bidders, contractors can be highly selective, strengthening pricing power and margins. Limited market capacity also intensifies labour shortages.

Reduced competition

With two or three bidders per tender, contractors retain stronger negotiating power and healthier margins. Clients may struggle to attract sufficient bidders as market capacity tightens.

Balanced competition

Supply and demand are broadly aligned, creating competitive but sustainable pricing and predictable win rates. Market conditions favour neither clients nor contractors.

Competitive market

With around five to eight bidders per tender, competition increases and pricing pressure reduces margins. Contractors must clearly differentiate themselves to secure work.

Highly competitive

When tenders attract more than eight or nine bidders, clients gain stronger negotiating power. However, sustained pricing pressure can increase the risk of contractor insolvencies.

Global tendering conditions are gradually tightening, signalling a shift away from the highly competitive environment observed in recent years. The reduction in bidder participation is not simply the result of there being fewer contractors - but also increased selectivity as workloads recover.

This represents an inflection point in the market cycle - where contractors are prioritising higher-quality opportunities, leading to:

Fewer bidders per tender
Stronger pricing discipline
Improved margin outcomes

Most regional markets expect tendering conditions to remain broadly stable, suggesting a period of equilibrium rather than rapid change.

Figure 10:

Regional construction tendering competition

Figure 11:

Regional construction market outlook

CAPACITY

Contractor capacity

Contractor capacity is increasingly uneven across sectors, reflecting divergent demand.

Traditional sectors such as commercial, residential and hospitality report high levels of balanced or spare capacity, often exceeding 60–70 percent.

In contrast, capacity is tightening significantly in high-growth sectors like infrastructure and industrial/logistics.

The data centre industry is the most constrained sector globally, with over 70 percent of markets reporting tightening or overstretched capacity. For data centres, our results show:

17.0 percent of markets reported balanced conditions
46.0 percent of markets reported that condition were tightening
26.0 percent of markets reported that capacity was constrained

This imbalance is driving:

Elevated margins
Increased delivery risk
Stronger contractor pricing power

This indicate a two-speed market, where cost escalation and pricing power are concentrated in capacity-constrained sectors, while traditional sectors remain more competitive.

RANKINGS

International construction cost rankings

International construction cost rankings provide a point-in-time view of how these dynamics are translating into relative cost positions across global markets.

At the top end, rankings remain largely unchanged from our past surveys. New York City and San Francisco remain as the most expensive markets, while Geneva and Zurich continue to rank highly.

US markets remain high overall, with several cities consistently featuring among the highest-cost locations globally.

Structural labour constraints
Elevated wage environments
Sustained demand in high-value sectors

Movement further down the rankings is also relatively limited, reinforcing the sense that construction markets have to an extent normalised themselves to the heightened level of global disruption we’re seeing.

Currency movements have contributed to some minor shifts. Recent US dollar fluctuations reflect changing expectations around inflation, interest rates and geopolitical developments.

Overall, the rankings highlight how local labour conditions, sector exposure and specific capacity constraints are key shapers of cost differences between locations.