Construction industry capacity shortages have prompted Mace to increase its forecast for tender cost inflation in London.

The company’s cost consultancy division reports that contractors are now turning down work in the capital as they are able to pick and choose their jobs. With competition falling, margins are rising, it says.

The surge in demand has led Mace to increase its forecast for London tender cost inflation from 3.5% to 4.5% for both 2014 and 2015.

Outside of London, there is still enough capacity across the UK to meet demand, as well as steady competition. This continues to subdue price increases. Mace’s forecast for average inflation in tender prices has therefore remained unchanged at 2% for 2014, rising to 2.5% in 2015 and 3% in 2016, by which time it is expected that the general economic recovery will have increased demand for construction across the regions.

The performance of private commercial work is also increasing, with the London office market proving to be increasingly active. However, across the rest of the country, Mace Cost Consultancy has found that the supply of private commercial space is still sufficient to meet general demand, confirming that this sector has not yet recovered across all UK regions.

In what Mace’s tender cost update calls the ‘next stage of the UK economic recovery’, capital investment has increased consistently over recent quarters. Business investment, one of the main components of fixed capital, grew by 5% to £33.4bn in the last quarter and is the highest since 2008 following five quarters of consecutive growth.

Mace Cost Consultancy managing director Chris Goldthorpe said: “While it is still possible to obtain competitive tender returns in the regions, the London market has seen contractors unable to meet the rising demand, resulting in a selective response to tender invitations and an unwillingness to take on risk.  It is now a regular occurrence for contractors to turn down tender opportunities, particularly if they involve single stage tendering, incomplete design information or significant construction risks.  We are also seeing overheads and profit allowances increasing to levels that have not been seen for the last five years as competition is reduced.”