Last week, we published our latest forecast for UK tender price inflation, in which we predict tender prices to decline by a further 6-9% this year and another 3-5% in 2010, due to increased competition as jobs complete and contractors chase a dwindling supply of work, as well as lower building material prices.
But it is not only the UK market that is seeing lower construction costs and declining tender prices. In the Middle East or more precisely in the UAE - Dubai and Abu Dhabi - the picture is similar.
Construction costs in the UAE have come down sharply since the second half of 2008, as raw material prices collapsed and work slowed sharply. Labour costs tend to not fluctuate as much as in the UK, so it is mainly lower building material prices that led to construction costs now being around 60% down from their peak in 2008. Further decreases are not excluded. As elsewhere, steel prices have slumped sharpest, while other materials, such as cement and concrete have seen lower price falls.
As less projects come through, competition in Dubai and Abu Dhabi is surging. Heavy discounting by contractors and competitive pricing of risk by clients, as well as still falling asset prices have all contributed to lower tender prices. Contractors' overheads and profits have decreased from around 12% to 2-4%, levels similar to those in the UK, and preliminary costs are also being squeezed.
We still maintain our view that tender prices in 2009 will decline by 10-15% on top of the 7-10% reduction seen over the latter half of last year. This is not only confined to Dubai, which has been dramatically hit by the slowdown, but also in Abu Dhabi where we have seen more re-tendering and project stops.
There are a number of ways clients could secure these lower prices, including competitively tendering their projects, increasing flexibility with regard to the contractor's supply chain and actively managing the project to secure a low exit cost.
Clients may start thinking about their buying window. Contractors have room for manoeuvre in a downturn, but for clients it can get harder to secure lower prices when the recovery eventually starts. They will try to catch opportunities on the downside to take advantage of good prices.
Also, low construction costs and tender prices may be limited in the future. We still expect relatively subdued construction prices over next 12 months or so, but inflation could rebound quickly.
Globally, wider inflation could be much higher in the future due to the quantitative easing and fiscal stimulus programmes many governments are implementing, the resumption in demand for commodities, and the drop in productive capacity investment seen since last year. In addition, local factors, such as the size of the key commercial and residential markets, as well as loss of capacity through business failure and labour force losses will impact on future construction inflation rates.
Maren Baldauf-Cunnington is a construction economist with cost consultant Davis Langdon and is based in Dubai