In this quarter’s analysis of construction materials and labour prices, Davis Langdon reports on the inflationary effect of steel costs (which may have peaked) and wage increases (which continue unabated)

Key trends

  • With the crisis in steel prices seemingly over, at least temporarily, materials price increases may have peaked.
  • But forthcoming labour cost increases will ensure that building costs maintain their high inflationary trend.
  • Lower wage increases for electricians and heating engineers will help to subdue next year’s rise in mechanical and electrical (M&E) costs.

Building costs have increased 7.3% over the past 12 months to the first quarter of 2005, overtaking figures registered by mechanical and electrical costs, which rose 6.3% and 6.1% respectively.

Building labour costs have risen more than M&E labour over the past year, and are set to outstrip M&E again in 2005.

Building materials costs for new non-housing work have also shown the highest rise over the past year, increasing by 10.2%. But materials costs for housing work rose by only 4.1%, reflecting the greater influence of steel prices in the non-housing sector.

Electrical materials costs continued to rise at an increasing pace, registering 10.1% higher than the first quarter of last year.

Mechanical materials costs rose slightly less at 8%, with M&E costs both affected by last year’s surge in steel, copper and plastics prices.

Price adjustment formulae for construction contracts

Price adjustment formulae indices, compiled by the Department of Trade and Industry and Official of National Statistics, help calculate increased costs on fluctuating or variation-of-price contracts. They provide useful guidance on cost changes in various 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 7.7%. But since July 2004, the average increase has been only 2.7%. This is largely because the last building wage award was at the end of June 2004, lifting the cost of labour by 6.9%. Since July 2004, six work categories have fallen (see table)

Prices for sand and gravel and crushed rock in particular fell during the second half of last year, but price rises have been introduced by quarrying operations since the turn of this year.

The highest cost increases have continued to be influenced by steel. However, it appears the rise in the price of steel in 2004 has largely passed its way into the supply chain. The index for steel windows and doors has not changed since January; the provisional figures for metal decking and coated steel cladding show a slight fall in April.

Materials

Consumer price inflation is likely to exceed the government’s 2% target, while construction materials have started a downward trend, thanks to stabilising steel prices

Key indicators

The annual percentage change measured by the Consumer Prices Index has been edging up since last autumn and is now just beneath the target figure of 2%. This index last registered an increase of this magnitude exactly seven years ago in April 1998. The rate of increase since the beginning of the year has been particularly sharp, with the index rising by 1.1% in the three months since January. The Bank of England acknowledges, with the increase broadly based and not solely attributable to the impact of higher oil prices, that the index is expected to rise above its 2% target later this year. Britain’s inflation rate is now only just below the European average of 2.1%.

The rate of increase in the price of materials and fuels bought by industry generally has continued to rise, although the increase may have peaked in March, when the year-on-year figure stood at 11.1%. This level of increase has not been exceeded since March 1985 although the two most recent periods of input price inflation resulted in similar peaks in September 2000 (10.5%) and April 1995 (10.8%).

Prices actually fell 0.6% between March and April, reflecting price falls in fuels and imported materials (including crude oil). But over the full 12-month period, the crude oil price input rose 49% and was solely responsible for 6% of the 12-month percentage increase.

Excluding the food, beverages, tobacco and petroleum industries, manufacturers’ input prices rose by a lower 6.9% over the year, also recording a 0.6% fall in April.

The rate of increase of output prices has started to rise again. Output prices for all manufactured products have risen 1.5% since January but excluding food, beverages, tobacco and petroleum products, the rise has been a more subdued 0.5%. Thirty-five per cent of the annual increase in output prices for all manufactured products was down to petroleum products but recent falls in prices at the pumps, following an easing in oil prices, should generate a fall in the index in the near future.

Construction materials

The trend in inflation figures for most construction materials is downwards, although the year-on-year percentage increases recorded are still near record highs. Construction materials in total rose by 6.8% over the year to April but this figure disguises the varying figures attributable to different sectors as shown in the table. Materials costs for new housing have risen at a relatively low 3.9% over the past year but materials going into non-housing work have averaged a rise of 9.1%. Much of this was attributable to structural steel and other steel-based products. With steel prices now stable or even falling slightly, this index shows an increase of just 2% over the past six months and the year-on-year trend should continue to fall.

Electrical services materials prices still register the highest rate of annual increase but have risen only just over 1% in the four months since last November. As well as steel, materials prices in this sector have been forced up by record copper prices and high plastic prices, both of which look as though they may have passed their peaks. ONS figures identify the following significant materials price changes over the last 12 months since April 2004

Labour

Later this month, two new pay deals for building operatives will come into effect, which will increase rates by more than 10% for some well-qualified workers

Plumbers and building operatives

Plumbers
Basic wage rates for plumbers in Scotland and Northern Ireland rose on 30 May 2005 by 5% to 6.6% depending on grade. Wage rates for plumbers in England and Wales rose by 6% on 3 January.

Building operatives
The Building and Allied Trades Joint Industrial Council has agreed new wage rates that will come into effect on 13 June. The agreement affects operatives working for small and medium-sized building firms belonging to the Federation of Master Builders. The deal represents a 10.4% rise in basic rates for craft operatives with NVQ level 3 and a 10.1% rise for NVQ level 2 holders.

Adult general operatives and semi-skilled grades will receive a lower increase worth 5.9%. Travel time will now be paid at standard hourly rates of pay.

The third and largest part of the Construction Industry Joint Council Working Rule Agreement – a three-year settlement that has been in force since June 2003 – will come into effect on 27 June. Basic rates of pay for craft, general operatives and intermediate skill rates will rise by 9.5%. Construction industry pay will have risen 23% over the three-year life of the agreement.

Rates of pay for apprentices were only recently agreed. The new rates represent increases varying between 2.8% for year-three apprentices with no NVQ to 10.1% with an NVQ2.

In spite of the hefty increase in basic wage rates under the national agreement over the last three years, site rates will incorporate substantial premiums and bonuses, leading to typical site rates in many regions that are well in excess of the rates set out below.

Guide to data

Davis Langdon’s series of cost indices track movements in the input costs of construction work in various sectors, incorporating national wage agreements and changes in materials prices as measured by government index series. They provide an underlying indication of price changes and differential movements in the various work sectors, but do not reflect changes in market conditions affecting profit and overheads provisions, site wage rates, bonuses or materials’ price discounts/premiums. Market conditions are recorded in Davis Langdon’s quarterly Market Forecast (last published 13 May).

Materials - Key trends

↑ Consumer prices look likely to breach the government’s target figure
↑ Industry input prices at near 20-year high
↑ Energy and oil costs continue to be the main culprits
↑ Metal prices drive industry’s output price inflation
↑ Industry output prices are at an eight-year high
↓ Year-on-year materials price inflation to decline as steel prices stabilise

Labour - Key trends

↑ Wage rates for plumbers throughout the UK roughly 6% higher
↑ Building workers in small and medium small firms to get 10% rise
↑ Plasterers remain the trade causing the greatest supply difficulties
↑ Bricklayers in the North-west now earn more than in London