Cost update: March 2006

Key trends

[UP] Building costs have been rising faster than mechanical or electrical costs

[DOWN] Most steel components now lower in cost after a fall in worldwide steel prices

[UP] Highest inflation in elements containing base metals such as copper, zinc and aluminium

The graph right shows how Davis Langdon's index series, reflecting cost movements in different sectors of the construction industry, have fared over the past six years, with the movement of the Consumer Prices Index for comparison.

All of the construction cost index measures continue to register increases way in excess of the movement of general consumer prices. In the case of the Building Cost Index, the annual rise to the fourth quarter 2005 was more than three times the rise in consumer prices. Although construction materials prices rose (2.5%) at a rate considerably faster than their historical trend, the more important driver was labour.

There has been a greater increase in mechanical materials prices over the past year than for building materials (see overleaf) but a lower wage increase in October (5%) has resulted in a lower overall rise in mechanical services costs.

The increase in the Electrical Cost Index is now, once again, lower than the other two measures. The cost of employing a gang in London rose by a little over 5% to the end of the year, whereas electrical materials prices stabilised during 2005.

Price adjustment formulae

Price adjustment formulae indices, compiled by DTI and ONS, are designed for the calculation of increased costs on fluctuating or variation of price contracts. They provide useful guidance on cost changes in various trades and industry sectors and on the differential movement of work sections in Spon's Price Books.

Over the past year, the average increase in the 60 building work categories has been 5.4%; over the past six months the average change has been an increase of 0.6%. Both figures hide a wide range of numbers for individual work categories. Over the past year five categories show a fall in cost, including the following three steel-related items:

Windows and doors: Steel -13.3
Concrete: Reinforcement -8.5
Piling: Steel -4.2

The highest increases have been in:

Cladding and covering: Copper +19.1
Cladding and covering: Zinc +15.3
Pipes and accessories: Copper +14.8
Finishes: Bitumen, resin and rubber latex flooring +11.0

The first three items are a reflection of the rapid increase the world has seen in metal commodity prices, particularly copper, which, on the London Metal Exchange, has trebled in three years.

Looking at trends just over the past six months, after the introduction of last year's summer wage award for building operatives, 19 work categories registered falls. The most significant related to the decline in steel prices after the 2004 crisis, including:

Metal: Decking -5.9
Piling: Steel -4.6
Windows and doors: Steel -3.6
Cladding and covering: Coated steel -3.1
Raised access floors -3.0

The most significant increases in costs relate to the steepening trend line of metal prices over the last year, now having to be passed on :

Pipes and accessories: Copper +12.0
Cladding and covering: Copper +10.5
Cladding and covering: Lead +4.2
Cladding and covering: Zinc +4.1
Pipes and accessories: Aluminium +3.7

Materials

As electricity and gas prices continue to overheat, materials prices remain high - but at least the rate of growth is down, especially in the mechanical and electrical sectors.

Key trends

[DOWN] Consumer price inflation back close to government target

[UP] Industry input prices at highest level for more than a quarter of a century

[UP] Electricity and gas prices largely to blame

[UP] Energy price rises result in numerous construction materials price increases at the beginning of 2006

[DOWN] Mechanical services materials prices show highest rate of increase over the past year but the rate is down compared to 2004. Record high copper prices are the main cause of this

[UP] Electrical materials prices back to stability after 11% rise in 2004.

Construction materials

Construction materials price increases during 2005 averaged 2.5%, down from the 6.6% recorded in 2004 but higher than the output prices of many other industries. The 2004 figure was driven by the steel crisis and its impact on steel and all steel-related products. Steel prices drifted downwards in 2005, hence the lower figure shown above for non-housing materials, which include a higher proportion of steel than in housing or repair and maintenance work.

The table includes some significant price rises that have occurred in January. Many manufacturers have introduced price increases higher than in other years to reflect their cost increases, in particular, the large energy bills with which many have been faced. The table reflects price rises introduced by energy intensive industries such as cement manufacture and brick making. Less dramatic price rises have been instigated by plaster and plasterboard manufacturers and makers of insulation and clay and plastic drainage products amongst many others.

The decline noted above in the price of fabricated steelwork may have reached its end. Corus introduced a £20 per tonne increase in the price of structural sections last October and a further £20 per tonne increase at the end of February, citing higher energy costs and raw material prices. A further rise of £20-30 per tonne is expected around May.

Reinforcement may also have bottomed out. Prices have risen by about 6% since last summer but the historical volatility remains.

Labour

The latest labour cost increases are for plumbers and electricians - but the former will be sucking their teeth as they get the lowest wage rise in years at just 3.5%

Executive summary

Employment in the construction industry continued to grow throughout 2005 with figures passing the 1.8 million mark. Average employment numbers in 2005 were 5% higher than in 2004. DTI figures suggest that 60% of the workforce is directly employed.

Average earning in the construction industry grew 4.9% over the year to the fourth quarter 2005, compared with 3.6% in the economy as a whole.

The level of national wage agreements for 2006 are known for plumbers and electricians but, for building operatives, negotiations are currently under way for a new wage award due at the end of June. The current wage agreement for heating and ventilating operatives expires in October but negotiations for a new deal have not yet begun.

This year's wage deals:

• Plumbers: up 3.5% - one of the lowest wage deals in the industry in recent years
• Electricians: up 4.5%
• Building operatives: opening demand from the unions 66%; latest offer from the employers of 11.1% over three years

The labour cost increases for plumbers and electricians in January come on top of a period of increasing materials cost increases in the services sector following, in particular, the surge in copper prices.

Plumbers and electricians

Plumbers

In July last year, a new two-year wage agreement was promulgated for plumbers and gas engineers in England and Wales, which saw basic hourly rates of pay increase 3.5% from 2 January 2006. The agreement provides for a further increase of 3.5% from 1 January 2007.

The current basic hourly rates of pay for the principal grades of operatives are now as follows:

Technical plumber and gas service technician £12.44
Advanced plumber and gas service engineer £11.20
Trained plumber and gas service fitter £9.60

These figures exclude responsibility/incentive pay allowances, which may continue to enhance the basic rates of pay above by up to 84p per hour.

Similar percentage wage increases came into effect for apprentices and adult trainees.

Daily travel time allowances rose an average 4% but mileage allowances have gone up from 30p to 40p per mile.

Plumbers' welding supplements (worth up to 46p per hour) and subsistence and lodging allowances have not changed. The first two have now been fixed at their current levels since May 1998.

Overtime rates now come into effect after 43 hours rather than 45 hours worked in a week.

Electricians

From 9 January, the second part of the Joint Industry Board for the Electrical Contracting Industry three year wage agreement came into force. This provided an increase in both National Standard and London Rates of 4.5% for all grades. Daily travel allowances and travelling time payments also rose 4.5%. The new hourly rates are shown in the grapph below.

In Scotland, operatives employed under the National Working Rules of the Scottish Joint Industry Board for the Electrical Contracting Industry, receive parallel wage rates.