In this new series,We report that tender prices are on the up – including London, where work is getting back on track

Davis Langdon’s Tender Price Index shows a 1.4% jump in the third quarter 2004. Because of the preceding period of stability, this still results in an increase of only 2.3% over the past year. Davis Langdon’s index shows the price movement of competitively tendered work in the Greater London area, where workload eased in 2003 and the first part of 2004. In contrast, every other region – except parts of the South-east – has seen construction output and new orders continue to rise. As a consequence, tender prices everywhere else, fuelled by demand and rising input costs, have risen significantly more (see table page 72).

In London, the value of new orders secured by contractors has recovered strongly since the beginning of the year – orders in the commercial sector have included Arsenal’s £220m football stadium and office developments such as Unilever’s £90m redevelopment scheme. New orders in the public and private housing sectors were also strong in the first half of 2004 and the shortfall in workload in the capital may now be over. This means there is likely to be a higher rise in prices over the next year. The forecast is for a rise of 3.5-4.5% over the next 12 months and by 4-5% the year after. Nationally, the rise next year may still be higher than in London, at 4-5%, but the year after price pressures may be greater in the capital and national average inflation may ease to 3.5-4.5%.

Economic background

Data issued recently by the Office for National Statistics showed a surprisingly sharp slowdown in Britain’s economy, with GDP estimated to have grown just 0.4% in the third quarter, down from 0.9% in the second quarter. This was driven by a 1.1% drop in output from the industrial sector, the sharpest decline for two and a half years, which suffered from the shutting down for maintenance of some North Sea oil production but also weakness in manufacturing.

The chancellor’s forecast growth of 3% this year remains on target but economists are beginning to suggest that next year’s forecast of another year of growth in excess of 3% is in jeopardy. Global growth is now expected to be slower than previously anticipated, largely because of the continuing high oil prices. City commentators are more pessimistic about the outlook for growth and corporate profits than they have been for more than three years. The average of City and academic forecasts is now for economic growth to fall to 2.5% next year, 0.5% below the bottom of the range of Gordon Brown’s Budget forecast.

Continuing high oil prices may not be good for companies but lower tax receipts as a result of reduced growth for the chancellor will be compensated by additional tax paid by North Sea oil producers and tax paid by motorists. It has been calculated that the chancellor’s coffers may be boosted by as much as £5.7bn.

Procurement and market trends

  • The rise of partnering and negotiated work has led to increased profit margins throughout the construction chain and the strong construction market has enabled contractors to look for higher returns on tendered work as well.
  • Ten years after its introduction, the New Engineering Contract is at last finding favour as clients, particularly local authorities, are eager to demonstrate their commitment to partnering.
  • Contractors are now resisting competitive single stage design-and-build invitations because of the high bidding costs involved.
  • Firms are also limiting the number of PFI projects they will bid for in one financial year.
  • All consultants, including architects, engineers and surveyors, are having difficulty in recruiting quality staff.

Executive summary

↑Tender prices rose 1.4% in Greater London in the third quarter 2004 following a period of stability and 2.3% over the year since third quarter 2003

↑Tender prices in the rest of UK have risen 3% to 5% over the last year

↑Notional building costs have increased 6.7% over the year to the third quarter 2004

↑Mechanical services costs rose 4.3% and electrical services 7.9% over the year to 3Q04

↑Over the same period, the Retail Prices Index rose 3.1% and the Consumer Prices index went up 1.2%