BUILDING FOR THE FUTURE – AECOM REPORT

AECOM proposes pathway to accelerate vital infrastructure delivery in Ireland

In its 2025 review of the Irish construction industry, AECOM has outlined the challenges and opportunities for the Irish economy and in particular, is proposing an approach of ‘Programmatic Thinking’ to support a higher volume and faster delivery of critical infrastructure projects. This approach would also help address the gap in productivity identified by the Irish Fiscal Advisory Council between the construction industries in Ireland and other European countries.

The 2025 Annual Review delves into construction industry performance, trends and forecasts for the year ahead, covering both the Republic of Ireland and Northern Ireland. Key factors influencing construction projects and infrastructure development in 2025 in the Republic of Ireland include:

• AECOM forecasts 5% growth in output volume in 2025 after some years of mixed performance. Inflation is still a feature of the market, but tender price inflation will continue to cool in 2025 and is expected to be in the order of 3%.
• The Republic of Ireland’s economy is strong, however addressing the construction industry productivity gap of 30% compared to other European countries is essential for long-term competitiveness.
• The adoption of ‘Programmatic Thinking’, already in use on projects by Iarnród Éireann, the HSE, the Land Development Agency and Uisce Éireann, provides an approach to drive greater efficiency and enhanced delivery timelines on major State infrastructure projects.
• A range of factors including extended planning and mobilisation periods mean that construction projects in Ireland are taking longer to complete. AECOM’s research indicates that adopting a programmatic approach to managing large-scale projects can accelerate construction timelines.
• There were 54,574 housing starts in the first 11 months of 2024, however, record levels of State investment need to be matched by similar levels of growth in investment from the private sector to meet the huge demand for homes. Continuing viability challenges and lack of supporting water, energy and transport infrastructure are the biggest issues facing the market and could hinder the conversion of existing residential planning permissions into completed developments.
• Despite ambition and available capital to deliver national infrastructure projects, the availability of a skilled workforce will continue to be a challenge for the Irish economy in 2025. This includes a less-reported undersupply of contractor management and supervision resources, and staff in professional services firms.

John O’Regan, Director and Country Leader for the Republic of Ireland at AECOM, said: “Ireland’s strong economic performance and record Government investment in housing and infrastructure reflect a nation building for the future. However, delivering on these ambitions requires a coordinated, programmatic approach to ensure that housing, transport, water and energy systems develop in tandem. With the construction sector at the forefront of this transformation, we have a unique opportunity to address critical challenges, drive sustainable growth and enhance Ireland’s competitiveness on the global stage.”

Construction output
ROI’s official measure of total public and private investment in the building and construction sector is measured as Gross Fixed Capital Formation (GFCF). This includes housing, commercial building, civil engineering and public infrastructure.
According to the Government’s BUILD 2024 report (published July 2024), GFCF stood at €31.5 billion in 2023, a 6% increase on 2022. The report also forecast GFCF to rise to €36 billion in 2024 as a whole and to continue growing through to 2027.

What are the factors driving this figure?
The fundamentals of the economy are good in terms of growth and budgetary position. This, combined with ROI’s strong, active EU membership and continued deep economic and cultural links with the US, provides a positive backdrop for the construction sector. However, there are hurdles which must be overcome for this predicted growth trajectory to be realised in the coming years.

Resource constraints
Employment numbers in the industry have stalled in the last 18-24 months and this constraint is being felt in all areas of the industry. There has been a significant media focus on the shortage of trades people and the need to increase apprentice numbers, but there is also a less-reported undersupply of contractor management, supervision resources and staff in professional services firms.

This has, in some instances, had an impact on project progress, adding to project duration. The allocation of these scarce resources is reflected in the level of preliminaries on projects.
Whilst every project is different and priced accordingly, from our benchmark data there has been a trend of a high level of preliminaries over the last 24 months, albeit moderating somewhat in 2024.

Productivity
As highlighted by the Irish Fiscal Advisory Council at the end of October 2024, productivity in the construction sector is approximately 30% below other European countries.

This is due to a range of factors, including the cyclical nature of the industry and corresponding investment deficits and the relatively small scale of firms in the sector. All of this points to adopting a programmatic approach, which requires a more consistent and visible pipeline of investment which in turn generates confidence to invest and increase the scale of businesses.

Construction delivery durations
Construction delivery durations are proving increasingly challenging due to a range of factors including resource challenges, the need for extended mobilisation periods, prolonged lead in times on procurement of key materials and equipment and the availability of sub-contractors, specialists and their resources over the construction duration.

From analysis of a range of social infrastructure projects AECOM is managing in the education, healthcare and social and affordable residential sectors, there is a clear programme advantage to delivering at scale. Indicative construction durations for project scales are included in Figure 3. If we look at our projects through the lens of programmatic thinking, we can identify the benefits potentially attainable.

Construction industry outlook for 2025
Trade dynamics with major partners, such as the US, are essential for Ireland. With a new US administration in place in January 2025, any new trade agreements, tariffs or regulatory changes – particularly in data protection, digital services and pharmaceuticals – could either open up opportunities or create challenges for Irish exports and multinational operations.

Whilst the 2025 Budget included announcements of strong infrastructure investment levels, bolstered by the European Court of Justice ruling on Apple back taxes of €14 billion, it is expected that there will be some modification of the precise spending plans undertaken by the incoming Government.

This may result in some re-profiling of expenditure across 2025 but we do not expect it to have a material impact. However, this lag is inevitable and we do not expect it to have a significant impact long-term. Provided public finances remain strong, infrastructure investment should continue.

In this upcoming period of robust State funding for infrastructure, project sponsors must ensure that the incoming Government understands and supports their projects and programmes and will champion them. It will be a time that calls for communication, collaboration and education between public and private sectors to realise the ambitious pipeline of work we have ahead of us.

Looking at ROI’s construction industry prospects for 2025 and beyond, it is likely Government investment in the residential sector will continue at the same strong, if not even higher level, given the unprecedented demand.
Another key indicator of the outlook for the industry is the data available from planning permissions granted. Acknowledging the time lag from grant of permission and construction activity, we have reviewed the high-level data over the last six years.

Notwithstanding the varying sector movements as highlighted in Figure 4, planning permission floor area granted in 2023 was at a similar level as in 2018. However, all sectors have demonstrated increases and decreases within this period, which is not surprising given that we experienced the Covid pandemic in the middle of this period.

The key trends to note are that residential represents over 60% of the floor area granted permission. Residential had an approximately 10% higher area granted permission in 2023 than in 2018. The industrial sector has also seen strong activity, with demand for space increasing and vacancy rates continuing at low levels. Nationally, the area of industrial space granted planning permission in the first six months of 2024 was up 73% on the same period in 2023.

Another positive trend from 2018 to 2023 is that granted planning in the health, education and other social infrastructure sectors has risen significantly, at over 65% in the six years – albeit these all start from a low base. Combined, they equate to approximately 15% of the residential floor area. The overall floor area granted permission in the first half of 2024 was an estimated 3% down on the equivalent period in 2023.
Overall, AECOM would anticipate a 5% growth in volume of output in 2025. In general, Ireland’s economic resilience seems strong for the year, especially in domestic sectors, yet it remains sensitive to global economic shifts and geopolitical uncertainties that could affect multinational operations and overall trade balances.

Construction costs and tender prices for 2025
After a tumultuous number of years off the back of Brexit, the Covid pandemic and the outbreak of war in Ukraine, 2024 saw a continuation of the reductions in the pace of tender price increases, which started in 2023.

The market has adjusted to these global factors, which impacted on the availability and cost of key elements in the supply chain and raw materials. We are now in a low inflationary period, with the CSO building materials index showing a 0.28% increase over the 12 months to August 2024. However, as an open economy, with a large proportion of national income dependent on a small number of global businesses, ROI remains vulnerable to global shocks.

When considering local input costs, 2024 saw the formal introduction of the Price Variation Clause amendment to the public works contracts. This allows for contract price adjustments in response to fluctuations in the price of materials and fuel and in some cases, labour costs. Under ROI’s sectoral employment order, which sets the statutory minimum rates of pay for the construction sector, there was a 3.5% increase in labour rates awarded in August 2024.

Ireland’s labour market is likely to remain tight, with low unemployment driving up wage growth. This could be a double-edged sword; higher wages benefit workers but could add cost pressures for businesses, potentially impacting Ireland’s competitiveness.

In terms of tender prices, 2023 saw the AECOM Tender Price Index moderate to 5%. This downward trend continued through 2024 to a national average of 4%.
Taking all these factors into consideration, the expectation is that construction costs and tender price inflation will continue in low single-digit percentages through 2025. We forecast national average tender price inflation at 3% for 2025.

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Michael McDonnell Managing Editor of Irish Construction Industry Magazine & Plan Magazine

Email: michael@irishconstruction.com      WWW.MCDMEDIA.IE