Manufacturing input costs surge as oil and import prices drive inflation higher, although material cost pressures continue to ease, report Máren Baldauf and Jay Kotecha of Davis Langdon

01 Key trends

  • Oil costs and higher import prices drive inflation higher
  • Manufacturers’ input costs rising at fastest pace since records began
  • Official figures show the rate of construction materials price inflation reducing. Materials cost pressures fade in the latter half of 2007 but steel and metals prices head upwards again

(See table for percentage change year on year (1Q07-1Q08)).

Building cost inflation has eased in the year to the 1st quarter of 2008, rising by 4.3%; this compares to a 5.5% increase during the same period last year. The downwards trend reflects an ease in materials price inflation. The rise in mechanical costs also moderated in the year to the 1st quarter of 2008, increasing by 3.7%, following a figure of 4.3% three months ago, again due to easier materials price rises. Electrical cost inflation in the last three quarters has been steady at 4.2%. Prices for electrical materials in the year ending February 2008 rose by 2.9%, compared to 6.9% in the year ending in February 2007.

Consumer price inflation is forecast to remain elevated, as fuel price increases continue to filter through.

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 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 2 May).

02 Price adjustment formulae for construction

Price Adjustment Formulae indices, compiled by BERR and ONS, 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.

Categories showing the largest increase (in % change) over the past six months are:

  • Bituminous surfacing to roads and paths +10.2
  • Natural stone +8.0
  • Concrete +5.2
  • Sanitary fittings +3.9
  • Mild steel pipes +3.7
  • Steelwork +3.5
  • Plastic pipes +3.5

Among those that registered a fall were:

  • Leadwork –3.7
  • Copper tubes, fittings and cylinders –3.5
  • Built-up felt roofing –2.9
  • Built-up felt roofing on metal decking –2.7

Most marked movements over the year:

  • Leadwork +24.0
  • Steelwork +10.3
  • Natural stone +10.0
  • Steel sheet piling +9.4

Leadwork prices head the table with the highest price increase over the last year but the price of lead itself is now back to almost the same level as a year ago, having fallen by a third since the beginning of March.

Prices of building components should soon follow suit.

Materials

Consumer price inflation remains above government targets and producers’ output prices are rising at the fastest pace for 18 years

03 Executive summary

  • Consumer Price Inflation jumped to 3% in April and is expected to rise further, reflecting higher energy and food prices
  • Oil prices continue to surge, with Brent crude averaging $110 in April and breaking the $130/barrel mark in May
  • Producer input costs continue to rise sharply
  • Producers’ output prices rise at highest level for 18 years
  • Construction material price increases moderate, as concerns over the pace of construction activity increase

04 Key indicators

(see file attached)

Labour

Construction wages continue to decline but some local increases are planned for June

05 Executive summary

• Figures from the Office for National Statistics show that average earnings in construction peaked at 3.3% in May last year and have since progressively declined: latest figures show that earnings in the first three months of 2008 were 1% lower than over the same period of 2007

• In June there will be wage increases for plumbers in Scotland and Northern Ireland and builders and civil engineering operatives under national agreements

Plumbers in Scotland and Northern Ireland

From 2 June 2008 plumber will get from a 4.6% increase in basic rates. Revised hourly rates for the principal grades will be:

  • Technician plumber and gas services technician £13.38
  • Advanced plumber, advanced heating fitter & gas service engineer £12.08
  • Plumber, domestic heating fitter & gas service fitter £10.61
  • Plumbing labourer £9.46

Plumbers in England and Wales received a similar increase from early January though their hourly rates are a few pence more.

Building and civil engineering operatives

New wage rates under the BATJIC agreement for operatives working for small and medium-sized building firms are expected from 9 June, but as of mid-May, agreement was still to be reached.

CIJC agreement, from 30 June 2008

Basic wage rates under the CIJC agreement will rise by 6% from 30 June 2008.

Wage agreement summary

(See file attached).