Cost update Q4 2012

01 / KEY CHANGES

• All construction cost measures have reversed their decline but largely due to withdrawal of National Insurance concession on holiday pay
• Consumer price inflation is on an upward trend as a result of government decisions on university fees and utility requirements
• Industry input and output cost inflation are both benign
• Recent sterling deflation may result in inflation in imported construction materials, metals and oil prices
• Construction materials prices were subdued throughout 2012
• Steel prices declined in second half of 2012 but are rising at start of 2013
• Most construction operatives secure small wage increases at start of 2013

The following chart shows how Davis Langdon’s index series, reflecting cost movements in different sectors of the construction industry, have fared since 2000, with the movement of the Consumer Prices Index for comparison.

Building cost index
The index jumped 1.3% in the final quarter of 2012, largely because of the withdrawal of the National Insurance concession on holiday pay schemes.

Mechanical cost index
Materials prices were declining as the year ended but increased National Insurance payments on payrolls pushed the index up.

Electrical cost index
There was a further drop in materials prices at the end of the year but the end of the National Insurance concession also increases electricians’ employment costs.

Consumer prices index
Jumped 1.2% in the fourth quarter, largely due to higher university tuition fees and gas and electricity bills. The annual rate of increase remained at 2.7% in January but cheaper clothing and footwear brought the index down by 0.5%.

02 / PRICE ADJUSTMENT FORMULAE FOR CONSTRUCTION CONTRACTS

Price Adjustment Formulae indices, compiled by the Building Cost Information Service (previously by the Department for Business, Innovation and Skills), 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 12 months between February 2012 and February 2013, the 60 building work categories recorded an average rise of 1.3%, reversing the downward trend that had characterised the previous 15 months.

The largest price increases over the last year have been in the following work categories:

And the largest fallers are:

Falls in prices have occurred in those work categories that have a high steel or aluminium content.

Steel prices declined steadily throughout 2012 but the beginning of 2013 has seen prices beginning to rise again. The decline in aluminium-based work categories reflects the decline in aluminium (and other metals) prices in the first half of last year.

03 / EXECUTIVE SUMMARY

• Consumer prices remain stubbornly above target and are forecast to rise further in the short term ▲
• Food and fuel prices have pushed industry input costs higher but have been balanced by cheaper imported goods ▲
• Industry output price inflation below 1.5% since mid 2012 ▶
• Metals prices have taken a recent dip ▼
• Recent decline in the value of the pound will push up the price of imported construction materials ▲
• Construction materials subdued throughout 2012 and ended year in decline ▼
• Steel prices led the price decline in the second half of last year ▼

The annual rate of increase remained at 2.7% for the fourth consecutive month but the index fell 0.5% in January as sales prices for clothing and footwear took effect. Inflation is forecast to rise in the short term as the pound’s recent depreciation lifts import prices.

Metal prices

05 / EXECUTIVE SUMMARY

• Over the three months to December 2012, weekly earnings in construction averaged £543, 0.4% lower than the same period the year before
• Average earnings throughout the whole economy rose by 1.4% over the period
• Construction redundancies in the October-December 2012 quarter rose back to 22,000 after improved figures of 18,000 and 12,000 in the two previous quarters. However, the latest Markit/CIPS UK Construction PMI reported higher employment levels in January, the first time in four months.

06 / WAGE AGREEMENTS

New wage agreements came into effect at the beginning of 2013 for building and civil engineering operatives, heating and ventilating operatives, electricians and steelworkers.

Builders and civil engineering

Builders’ wage rates set under the Construction Industry Joint Council agreement were last revised in September 2011. A new agreement provided a 2% increase in basic pay rates from 7 January 2013, hourly rates becoming:

Heating and ventilating

A 2013-14 wage agreement was concluded just before Christmas. An increase in pension contributions and some allowances came into effect from 28 January 2013 and a 1.5% increase in wage rates and other allowances will take effect from 1 April 2013.

Electricians

With the last revision to wage rates in January 2010, electricians have waited three years for a wage increase. From 7 January 2013 hourly rates rose by 1.5%. The principal rates for operatives with own transport became:

The agreement provides for a further 2% increase in basic rates from 6 January 2014.

Steelworkers

The National Joint Council for the Engineering Construction Industry has agreed a three-year deal that provides annual reviews for operatives starting with a 2% wage increase from 7 January 2013.

WAGE AGREEMENT SUMMARY

The following table summarises the wage agreements currently in force for the principal wage fixing bodies within the construction industry