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01 — Executive summary

Tender price index

Davis Langdon’s tender price index shows that building prices in Greater London continue to rise. Prices rose by 1.5% over the previous three months and 5.5% over the last year. Prices are forecast to rise by 4.5 to 5.5% over the next year (for other regions see page 58).

ÐÇ¿Õ´«Ã½ cost index

The building cost index has risen by 4.8% over the year to the third quarter of 2006. Over the past year, materials prices (7.5%) have risen at twice the rate of labour costs (3.6%). Over the next 12 months, the overall rate of increase is expected to moderate to 3.9%.

Retail prices index

The retail prices index increased 3.6% over the year to September 2006. If RPI was still the government’s target index, the Bank of England would have to have written a letter of explanation. Inflation is not expected to start falling until next year.

02 — Trends and forecast

Construction prices have been influenced by conflicting pressures this year. Materials prices have risen even faster than they did in 2004 (see page 58); labour costs have been held in check by greater availability (see below); and at the same time demand for contractors and subcontractors has grown.

Government figures show that total construction output in the first half of 2006 was the same as in 2005 but the volume of new work was 4% higher, even exceeding the record level of 2004. Contractors’ new orders paint an even rosier picture, the value of orders in the 12 months to August being 10% higher than over the previous year.

In London, the construction industry has rebounded strongly: output figures show that there was 17% more new work activity in the first half of 2006 compared to the same period of 2005 (at current prices). New orders are massively up, although the figures are distorted by the inclusion of projects such as the £1bn Bart’s hospital redevelopment. Excluding that, the value of new orders won by contractors in London in the first six months of 2006 was still more than 20% higher than in 2005, with strong increases in activity in every sector. But offices have inevitably led the way.

As a result, the London construction market has experienced considerable cost escalation, although traditional labour rates may not have moved much. Like other busy areas around the country, it has seen noticeable increases in main contractors’ preliminaries and overheads and profit allowances, as well as materials-driven price increases.

Major concrete packages have seen significant price rises – a result of price increases for concrete and reinforcement materials and of demand on the larger industry players. Curtain walling tenders have seen upward price revisions, partly because of increases in aluminium and glass prices but also as a result of the market consolidation reported in last quarter’s Market forecast (28 July).

Another indication of the tightening market is difficulties in compiling subcontract tender lists, already a problem with cladding. Requests for extensions to tender periods are becoming common again. Main contractors are reluctant to tender on a single-stage basis so two-stage tendering continues to increase. Even office refurbishments are now often let as two-stage design-and-build.

The rapid inflation seen in some materials (steel, aluminium, glass, stainless steel, reinforcement) has led some contractors to seek fluctuations clauses. The alternative is often inflated prices to cover additional risk.

The present London market is very busy and order books are filling up for next year. It seems likely that this pattern may now be maintained right up until 2012. There may still be room for competitive prices in the mid-market but the players at the top end may already be in the driving seat.

Construction output in 2006 will reverse the slight downturn seen last year. Experian Business Strategies and the ÐÇ¿Õ´«Ã½ Cost Information Service both now forecast 3% growth in new work this year, followed by rises of 3.5% and 4% in 2007 and 2008. These are national figures: growth rates in London will exceed these percentages.

With softening commodity prices, materials price pressures next year should be far less than in 2006. Despite increased demand for manpower, a greater pool of labour may keep a lid on site rate rises. Nevertheless, sharply rising workload is likely to maintain inflation in construction prices. Over the next year, tender prices are forecast to rise by 4.5% to 5.5% in Greater London: any price risk will be on the upside. Strong commercial activity in the following year, coupled with the start of the run-up to the Olympics, is likely to fuel even higher inflation and price rises of 5% to 6% should be anticipated.

Hot topic

The tabloids might be whipping up fears of more east Europeans coming to Britain to find work, but it is good news for skills-hungry construction sites, says Peter Fordham

Two years ago, every construction industry survey identified shortages of skilled labour as one of the main difficulties facing the industry. Today it is rarely seen as a serious issue. The accession of eight Eastern European countries into the European Union in May 2004 enabled large numbers of skilled and unskilled workers to enter the country legitimately and work in industries such as hospitality and construction that were short of homegrown labour.

Data compiled by the Office for National Statistics indicates that average earnings in construction rose by 6% in 2004 and by 4.3% in 2005, but in the summer of 2006 the ONS registered an increase of just 1.1% over the last year. At the same time, private sector earnings generally have risen by 3.9% last year and 4.4% in the year to this summer. Average wages in manufacturing rose by 3.6% last year and 5.3% this year.

The latest round of industry wage agreements has been lower than in previous years. Plumbers, steel erectors and building and civil engineering operatives have all had to settle for increases of 3.5% this year, compared to rises of 6%, 4.5% and 9.5% respectively last year.

It is understood that the first year of the new settlement for heating and ventilating operatives will also provide an increase of 3.5% – after a rise of 5% last year – from the beginning of November (still to be ratified at the time of writing).

The government’s official report into the effects on the UK labour market of allowing access to the labour market of nationals from the eight new entry countries – the Accession Monitoring Report – showed that just 16,670 people (out of a total of 447,000 who had applied to join the Worker Registration Scheme) were working in the construction sector. Workers who are self-employed are not included in these figures and it was estimated that these might bring the total number up to about 600,000, including about 100,000 working in the construction industry.

Not all the new entrants over the last two years have come from the latest EU accession countries. Migration from outside the EU has also been running at record levels and it is estimated that 1.4m non-British people were given the right to live and/or work in the UK in the two years since May 2004, pushing the population above 60 million for the first time and creating a still larger pool of available labour.

The Access Monitoring Report reveals that 62% of registered workers are from Poland and, while their geographical distribution covers the whole country, the largest numbers are in East Anglia, London and the Midlands. Wales has the smallest number of registered workers.

It is no coincidence that labour rates in London and the South-east have shown little change over the last year, while rates in Wales have continued to rise in response to the busy construction market in South Wales.

The Accession Report identified that most of the employed construction workers were as unskilled labourers. The largest group of skilled workers were carpenters but significant numbers were also employed as bricklayers, painters, plant operators and steel er