Construction costs are rising twice as fast as consumer prices on the back of rising oil and import prices, but the annual rate of growth is slowing, reports Peter Fordham of Davis Langdon
01 Key trends
- Industry input costs and output prices show record rises
- Oil costs and higher import prices drive inflation higher
- Steel and other metals prices head upwards again, despite fading pressure on materials costs in second half of 2007
The construction cost indices all show similar year-on-year inflation, more than double that of the consumer prices index. The building cost index, which shows the highest annual figure, has been steadily reducing for the past four quarters as the rate of materials price inflation has eased. At 4.9%, this is the lowest year-on-year inflation since the second quarter of 2004.
Conversely, inflation of the mechanical cost index has speeded up. This is largely because the 2007 wage increase for heating and ventilating operatives came into effect in September, whereas the award for 2006 came into effect only in November of that year. Looking forward, inflation of this index should begin to fall.
Electricians received a pay increase in January but inflation in the electrical cost index is expected to fall over the next two quarters.
The consumer prices index is forecast to maintain its upward trend at least until the middle of the year.
Guide to data
Davis Langdon’s 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 indices. They provide an underlying indication of price changes and differential movements in various work sectors but do not reflect changes in market conditions affecting profit and overheads provisions, site wage rates, bonuses or materials’ price discounts and premiums. Market conditions are recorded in Davis Langdon’s quarterly market forecast (last published 1 February).
The chart shows cost changes in different sectors over the past seven years, with the consumer prices index for comparison.
02 Price adjustment formulae for construction
Price adjustment formulae indices calculate cost changes on fluctuating or variation of price contracts and provide guidance on cost changes in various trades and sectors and on the movement of work sections in Spon’s Price Books. Over the 12 months to February 2008, the 60 categories showed an average rise of 4.3%, after a steady decline over 15 months from 7.1%. Over the past six months the average rise has been just 0.7%. (See table below to see what the categories showing the greatest variation from this are)
Plant costs have risen 6.1% over the past six months and 11.4% over the year, more than both labour and materials, largely because of rising fuel costs. Metal cladding categories have shown divergent cost trends, lead rising greatly over both six and 12 months while zinc and copper have reduced. Lead prices doubled between March and October last year before falling sharply in the last two months of the year as fears for the world economy surfaced. But since the end of January lead and other metals have risen markedly again as investors pour from equities into commodities. Zinc prices fell 45% between last May and the end of January but the past few weeks have seen some recovery. Copper prices have been more volatile but have risen fast since the end of December, gaining 35% as stocks fell.
Materials Inflation of the consumer price index is still close to government targets, but the pressure is back on construction materials costs after easing near the end of last year
03 Executive summary
- Consumer price inflation close to target but expected to rise because of higher energy and import prices
- Industries’ input costs surge to record levels
- Oil prices rise 70% in a year
- Industry output prices have risen at their fastest rate for nearly 12 years
- Construction material price inflation eased sharply in the second half of the year but substantial rises are in the pipeline
04 Key indicators
(See file attached)
Labour Construction wages rose relatively slowly last quarter, but more rises are in the pipeline
05 Executive summary
The Joint Industry Board for Plumbing Mechanical Engineering Services in England and Wales has agreed a two-year pay deal, with a 4.5% rise for plumbers and gas engineers from 7 January. Rates will rise a further 4.5% from 5 January 2009 unless the retail prices index exceeds 4.5%. Basic hourly rates of pay are now:
- Technical plumber and gas service technician: £13.46
- Advanced plumber and gas service engineer: £12.12
- Trained plumber and gas service fitter: £10.39
These exclude responsibility/incentive pay allowances, which may add up to 84p per hour. Daily travel time allowances have risen 4.5% but plumbers’ welding supplements (up to 46p per hour) and mileage allowances (40p per mile) are unchanged. The number of hours before overtime rates apply has been cut to 41 hours.
In September the Joint Industry Board for the Electrical Contracting Industry agreed a three-year pay settlement; the first part came into effect on 7 January. (See table attached below for details on who this provided a 4% rise in hourly rates to).
Rates for work within the M25 are 12% higher. Travel allowances and travelling time payments also rose by 4%. The number of hours worked before overtime fell to 37.5 hours. The agreement will see rates rise by 4.5% from 5 January 2009 and 5% from 4 January 2010. A parallel deal was agreed for Scotland.