Cost update: March 2007

01 Key changes

• Construction materials prices register double-digit inflation
• Mechanical and electrical materials costs begin to fall
• Copper prices eased last year but other metals continued upwards
• Steel prices rising steadily
• New wage awards for plumbers and electricians

The graph, right, shows movements of the sectors in the past seven years, with the consumer prices index for comparison.

Three months ago, the mechanical cost index displayed the highest year-on-year inflation (7.1%) but the rate has fallen since then and is now the lowest of the three construction indices, largely owing to a wage increase of 3.5% last November, compared with 5.1% in 2005.

Electricians received a 4.5% wage increase in January 2006 and a 5% rise in January 2007. This should ensure annual inflation continues in line with its average trend over the past six years. The building index shows the highest change. The figure fell last time owing to a lower wage increase in mid-2006 than in mid-2005, but has risen again as materials prices continued to increase to the end of the year.

The consumer index has recorded its highest annual inflation figure since 1996 but is still only half the level of construction cost trends.

02 Price adjustment formulae for construction contracts

Price adjustment formulae indices, compiled by the DTI and Office for National Statistics, calculate cost changes on fluctuating price contracts. They provide useful guidance on changes in various sectors and on the differential movement of work sections in Spon’s Price Books. Over the past year, the 60 building work categories rose by an average of 6.3%, including:

• Cladding and covering: zinc +27.2 %
• Concrete: reinforcement +20.2 %
• Waterproofing: asphalt +16.8 %
• Pipes and accessories: copper +15.1 %
• Cladding and covering: copper +14.0 %

Zinc cladding has taken the lead from copper. From May 2006 to February 2007, copper prices fell by 35%. Zinc rose by 30% from 1 October to 1 December 2006, before dropping again by 1 February. However, with both zinc and copper rising again in the second half of February, the falls may be shortlived.

Prices in Spon’s price books are based on materials prices collected in spring 2006 and the wage award that came into effect at the end of June. Over the seven months between July 2006 and February 2007, the 60 work categories registered an increase of 2.1%, though there were widely varying figures:

• Cladding and covering: lead +15.3
• Concrete: reinforcement +10.6
• Cladding and covering: zinc +8.6
• Waterproofing: asphalt +8.2
• Piling: steel +8.2
• Fencing +7.6
• Windows and doors: aluminium -6.2
• Pipes and accessories: copper -9.4
• Cladding and covering: copper -10.4

Copper prices have fallen since spring 2006 but lead and zinc rose until the start of 2007. The rise in reinforcement, steel piling and fencing costs in the second half of 2006 reflect the resurgence of steel prices.

Materials

There’s been no let-up in price rises for construction materials, with lead and tin hitting record highs. There is some respite, though: M&E prices are starting to dip

03 Executive summary

Consumer price inflation eases back to avoid embarrassment to the governor of the Bank of England

• Manufacturers’ input prices have largest fall for four years
• Electricity and gas prices still much higher than two years ago
• No let-up in construction materials price rises
• Mechanical and electrical services materials beginning to fall
• Lead and tin prices reach new record highs
• Steel prices once again beginning to make headlines

04 Key indicators

The annual percentage change in the consumer prices index eased back from 3.0% last December. The index fell 0.8% in January, largely owing to a fall in transport costs. Inflation over the past six months was benign compared to the previous six. The annual inflation rate is expected to fall below the 2% target in the next 12 months.

There has been a sharp fall in materials and fuel costs: the index fell by 2.5% between December and January owing to falling crude oil and fuel prices.

Crude oil prices peaked in July and fell in the second half of 2006, but recovered in February, with prices rising 20% from the $51 (£26) low recorded in mid-January. Gas prices peaked sharply in winter 2005/6 but fell in spring. December’s peak price was 26% below the previous year but still 35% higher than the winter 2004/5 peak.

Electricity rose by 50% during 2005 and another 15% to the end of 2006. The rise in non-ferrous metals in the past two years was partly reversed over the past nine months but iron and steel rose steadily through 2006. Price changes for different industries include:

• Mining and quarrying products -10.5%
• Wood and wood products +3.8%
• Rubber and plastic products +1.0%
• Fabricated metal products +2.8%
• Electrical machinery and apparatus +0.6%

Input costs have dropped but output prices are rising after dropping to 1.6% last October, owing mainly to tobacco, alcohol, food and metal products

There has been a sharp fall in materials and fuel costs: the index fell by 2.5% between December and January owing to falling crude oil and fuel prices.