Cost Update

<B>Hot rates</b>
This is a buoyant period for M&E contractors, so this quarter's Hot rates looks at prices for mechanical heating systems, concentrating on low-temperature hot-water heating pipework in London and Edinburgh. These are two current hot spots, although rates in Edinburgh are still considerably lower than in London. The rates given are associated with medium-sized building projects worth £1m-5m. The rates relate to Standard Method of Measurement of Building Works items and are representative of schemes with normal access and working conditions. The prices are averages from competitively-bid subcontract tenders received over the past three months. They do not include main contractors' profit or overheads. Rates can vary considerably within regions and between projects.
With M&E contractors working at close to full capacity, margins have improved over the past year. Heating and ventilating operatives received a nationally agreed wage increase of 5% last October and site rates in London, where labour is particularly scarce, have risen more.

<b>Building materials</b>
The annual inflation rate for materials and fuel purchased by the manufacturing industry has fallen from 14.5% in the last Cost update (24 November 2000, pages 61-63) to 5.7%. The index dropped 3.4% between November and December, reflecting a sharp fall in crude oil prices. Over the year, crude oil rose 16.2%, despite the 18.2% drop between November and December. The price of imported metals rose 14.3% in the year to December but fell back slightly in the last quarter.
The index excluding the food, beverages, petroleum and tobacco industries is far less volatile: the annual inflation rate climbed steadily last year and peaked in September at 4.6%. With the decline in oil prices, in December the annual rate had fallen to 2.7%.
Despite the relatively high input costs experienced over much of the last year, output prices of manufactured products have not exceeded an annual inflation rate of 3%. In the second half of 2000, output prices rose only 0.4%. Excluding the food, beverages, petroleum and tobacco industries, output prices rose 0.7% over the year and showed no change in the second half of 2000.
The annual rise in construction materials prices remains at 3.1%, the highest figure for almost five years. However, prices in the last three months of the year were static, although this is often the case ahead of new year price rises. Housebuilding materials prices similarly showed no movement in the last quarter and remain at an annual rate of 2.8%.
The higher cost of construction materials has been underpinned by increased demand over the past two to three years but also by the trebling of oil prices since the end of 1998. The price of oil has fallen back sharply from its high of $34 a barrel last autumn to $25 at the beginning of January, although it has since made a slight recovery. The Opec countries agreed to cut output by 1.5 million barrels a day from 1 February, to avoid a "price collapse". This triggered a $2 jump and took the price back above Opec's target of $22-28 a barrel. City analysts expect oil prices to hit $23-25 a barrel by the end of 2001.

<B>Building costs and tender prices</b>
Price adjustment formulae indices were designed to calculate increased costs on fluctuating or variation-of-price contracts. The indices are published monthly by the Stationery Office and also 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.
In the six months from July 2000 to January 2001, the average increase in the 60 building formula work categories has been just 0.8%. Of these, 35 have shown no change or an increase of less than 1%.
Four categories have shown small falls and 11 have risen more than 2% (tables below). Seven of these 11 relate to metalwork. Imported metal prices stabilised in the last months of 2000 but rose an average of 19% in the year to September 2000. The commodity price of copper rose 21% over that period and 37% over the 18 months from March 1999. Copper pipework prices react quickly to basic commodity prices; with copper prices on the London Metal Exchange falling 9% over the past four months, copper tubing and cladding costs may fall.
Aluminium commodity prices increased 22% in the year to September 2000 and 53% since March 1999. Unless basic aluminium prices fall quickly, aluminium cladding and pipework costs are likely to rise further.

<b>Labour: Electrical contracting
England and Wales</b>
In October 1999, the Joint Industry Board for the Electrical Contracting Industry unveiled its industrial determination for 2000/2001. This was a two-year agreement in two stages, the first payable from 7 February 2000. The second part came into effect on 8 January 2001.
The determination introduced a new wage structure, establishing separate rates for operatives, depending on whether they report directly to the shop and their method of transport to work. Travelling time and travel allowances were adjusted to reflect this.
From 8 January, national standard hourly rates for shop-reporting operatives rose 5.7%; job-reporting operatives whose transport is provided by their employer received a rise of 9.0-10.9% depending on grade; whereas job reporters with their own transport got rises of 11.0-14.1%. London rates typically increased 0.5-1.0% above the national standard.
However, further rationalisation of travelling time payments and travel allowances have been introduced. Last year, no travel allowance or travelling time was paid for distances under 10 miles. Now these shall be paid only to operatives who travel more than 15 miles from the shop. Payments for distances between 15 and 75 miles each way have been cut 12-16%. A typical labour bill for electricians is thought to have risen 5-6%.
From 8 January, rates for apprentices and trainees were brought into line with graded operatives by introducing different rates for shop reporting, job reporting (transport provided) and job reporting (own transport).
<b>Scotland</b>
The Scottish Joint Industry Board for the Electrical Contracting Industry also introduced a two-stage wage agreement, coming into effect on 7 February 2000 and 8 January 2001, that concurred with the standard rates introduced by the England and Wales body.
However the SJIB has just two rates: a shop rate, equivalent to the shop reporting rate above; and a travel rate, equivalent to the job reporting own transport rate above.
As in England and Wales, no additional travel payments are allowed for distances from the shop of fewer than 15 miles, but both travel allowances and travel time payments are 20-60% lower than the English payments.
<B>Dayworks</b>
Standard hourly base rates for dayworks, calculated in accordance with the various definitions of prime cost of daywork published by the RICS and the appropriate contractors' body, are listed above right for key personnel. For electricians, the rates came into effect on 8 January, when the new wage award came into effect. The rates represent only the most basic requirement. Extra payments or differentials relating to skill, responsibility or risk may legitimately be added to the base rates shown.