Cost update: September 2004

Key trends

? All measures of construction cost inflation have consistently outstripped consumer price inflation for the last three years

? Electrical costs have shown the biggest increase over the last year – rising 7.3%

? Building costs have risen by more than 6%, driven by substantial wage increases coming into effect at end of June 2004

? Mechanical costs are currently increasing at the slowest rate – after heading the inflation stakes in 2003.

The graph right shows how different cost index series have fared over the last three and a half years, with the movement of the Consumer Prices Index for comparison. The table of indices provides an update to the index series published in Spon’s.

Executive summary

Increases in labour costs, which are well ahead of inflation and levels of other industries, have been the principal driver behind increases in contractor’s input costs. Costs of some materials, particularly metals are also having a significant impact upon input costs. Costs in the civils and landscape sectors are closely following the building trend.

With long-term wage deals in place for all major groups of operatives, and a rising trend in material costs, the outlook is for further inflationary pressure upon contractors’ costs and tender prices. The stepped pattern of all of the cost index series indicates the importance of annual wage increases in the overall level of input costs.

Based on the wage increase for mechanical labour due in October 2004, the mechanical index will remain at a lower level than either the building or electrical sectors.

Price adjustment formulae

Price Adjustment Formulae Indices are designed for the calculation of increased costs on fluctuating or Variation of Price contracts. Indices are published monthly by The Stationery Office in Price Adjustment Formulae for Construction Contracts: Monthly Bulletin of Indices. They also 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 12 months between July 2003 and July 2004, the average movement in the 60 Building Formula work categories has been an increase of 6.6%. No work categories have shown a decline.

The work categories registering the highest increases over this period, all of which involve a significant component of steel, lead or copper, are shown in the table Price Adjustment Formulae.

Materials

It’s all rise for manufacturing and materials prices, with costs increasing well above consumer prices – with the exception of most base metals

Key trends

? Consumer prices – CPI annual increase 1.4%

? Industry input and output costs – Manufacturing inputs and outputs rising at the fastest rate for three years

? Construction materials prices – rising faster than general manufacturing outputs

? Mechanical and electrical services prices – metal prices driving up all materials prices

? Base metals – generally easing, except for lead

? Inflation is being driven by higher oil, base metal and steel prices

Key indicators

All the measures of consumer price inflation show higher trends of inflation than three months ago. The old Retail Prices Index now shows an increase over the last year of 3.0%, well in excess of the chancellor’s previous target of 2.5%, driven by higher mortgage interest payments.

Inflation in the UK, as measured by the Harmonised Index of Consumer Prices (CPI), remains well below the EU average of 2.4% (June 2004).

Both input costs and output prices to industry generally are also on a rising trend. Materials and fuel purchased by manufacturing industry are currently 3.2% higher than in July 2003. The annual figure hit 5.3% in May, the highest figure for three years. Most significantly, materials costs have risen by 3.9% since January.

The main drivers behind the rise in input prices have been the cost of imported metals (19% higher over the year), particularly steel (30% up) and crude oil (15% up).

Output prices have begun to follow suit as manufacturers pass on their cost increases. Annual inflation in the cost of “all manufactured products” hit 2.6% in June, its highest level for more than three years. Leaving aside food, beverages, tobacco and petroleum products, the output price increase over the year to July 2004 was at the lower figure of 1.6%. Significantly, this represents the highest annual percentage increase for eight years. Recovered secondary raw materials, which include recycled steel scrap, rose almost 36% over the year, including a leap of 8.6% in the single month between June and July.

Construction materials

All base metal prices have eased since peaking in February or March this year, following price rises that saw the price of copper more than double over a two-year period and lead follow suit in just 18 months. Lead prices fell sharply in the spring but have now recovered to previous levels. Copper prices too fell about 17% but have recovered about half of the loss.

DTI figures show that construction and housebuilding materials rose by 4.0% and 2.9% respectively over the year to June 2004, sharp jumps over previous figures, particularly in the non-housing sector. This is largely due to the big increases that have been seen this year in the price of steelwork, reinforcing bars and other steel-based construction items.

Similarly, mechanical and electrical services materials have experienced unusually high increases in prices. Again, this is due largely to the increase in the price of steel (pipes and radiators) and also to the significant increase in the price of other metals, particularly copper (pipes and cables) since November last year.

ONS identify the following significant materials price changes in the last 12 months.

Labour

Why brickies and sparks are feeling flush these days – and we zoom in on heating and ventilating operatives, who are getting a more moderate pay rise

Key trends

? Building operatives and electricians have enjoyed inflation-busting wage rises this year of over 7% on basic rates

? Electricians have agreed a three-year deal

? Heating and ventilating operatives look forward to a rise in October – but not as much as some

? Builders will receive another 9.5% from June 2005

Heating and ventilating operatives

In November 2003, the Joint Conciliation Committee of the Heating, Ventilating and Domestic Engineering Industry – which comprises the Heating and Ventilating Contractors’ Association, representing the employers and Amicus-MSF, representing employees – concluded a three-year wage agreement setting wage rates and allowances for 2003/4 to 2005/6.

The agreement provided for three annual wage increases, the first of which came into place on 3 November 2003. The second increase will come into effect on 4 October 2004. This provides for a 4.5% increase in hourly wage rates for all grades of operative.

The new rates can be seen in the table Hourly rates of wages from 4 October 2004.

There will also be a corresponding increase in daily travelling allowance, and mileage rates will rise from 12.5p per mile to 20p per mile.

Abnormal conditions money will not change and will remain at £2.99 a day.

The cost to employ a 12-man gang comprising foreman, one senior craftsman with welding skills, two senior craftsmen without responsibility, four craftsmen, two installers and two mates (over 18) – including allowances for overtime, incentive schemes and travelling – will rise to about £17.12 per man-hour.

This is calculated using the assumptions contained in the all-in hourly rate build-up used by Spon’s Mechanical and Electrical Services Price Book. Adding allowances for preliminaries, overheads and profit generates an all-inclusive man-hour rate of £21.74 per hour. This is the labour rate used in the 2005 edition of Spon’s Mechanical and Electrical Services Price Book.

The next increase in wages will not occur until 3 October 2005 but there will be changes to the daily travelling allowance provisions introduced from 4 April 2005. Two scales of allowance will be brought in, for those within and those outside the M25.

• Electricians

At the end of July, the Joint Industry Board for the Electrical Contracting Industry promulgated a new three-year wage deal, starting in January 2005. National standard rates will rise by 13.8% over the three years. Some London grades will receive a higher increase in the first year – so an approved electrician, for instance, will end up with a total rise of 15.5%. Further details will be provided in the next Cost Update.