Tender price forecast

Construction tender prices remained stable in the third quarter of 1999. The provisional third quarter index stands at 332, which is at the bottom of the range predicted in the last tender price forecast (30 July).

The provisional index for the second quarter has now been confirmed at 332. The same figure for the third quarter means that building prices in London have risen 4.4% over the past year. This is the lowest annual percentage increase in tender prices since the third quarter of 1997 but is lower than the annual increase in building costs for the first time since the end of 1996.

Output

The slowdown in the rate of increase in tender prices stems from the modest growth in workload. Latest DETR statistics show that total construction output, at constant seasonally adjusted prices, increased in the second quarter, but it is up just 1.4% over the past year and capacity has not been severely tested.

New work (as opposed to repair and maintenance) has grown more strongly. In the first six months of 1999, contractors undertook an additional £1.3bn of new work, compared with the same period last year. After price adjustment, this represents an increase of 3.2%. New workload in the first half of this year is 13% higher than the work available four years ago. This has enabled prices to rise 25% over this period, compared with the 12% increase in retail prices.

Preliminaries have shown an upward trend over the past two quarters, 12-14% now being a typical addition to the rest of the work. Of preliminaries costs, 50-60% is reserved for management and site staff costs. According to recruitment consultant Hays Montrose, salaries for good contracts managers in Surrey and south-west London have jumped 10-15% in recent months.

Brickwork and blockwork is one trade that has continued to show an upward trend. Brick and block manufacturers have been successful in securing increased prices as sales volumes have improved. Bricklayers' rates in the Home Counties have risen 10% in the past five months; £100-110 a day is now the typical rate advertised.

The last two upward inflation factors have been countered by extremely keen steelwork rates now being experienced on tenders around the country. Universal beams and columns are being erected at £850 a tonne, compared with, typically, £900 a tonne this time last year.

Principal industry forecasters predict that the industry will continue to grow over the next two years. Construction Forecasting and Research says total construction output in 2001 will be 7% higher than last year's total. The National Council of Building Material Producers is even more bullish, forecasting workload in 2001 to be 8.3% higher than last year. Both predict greater growth in repair and maintenance work rather than in new build, with the strongest upward trend in the public housing sector as government commitments outlined in the Comprehensive Spending Review come to fruition.

Repair, maintenance and improvements in the private housing sector are also expected to show a strong increase, bringing an extra £800-900m into the industry by 2001. Both CFR and BMP, publishing their last forecasts in July, predicted that new work output this year would exceed last year's total by about 2%, followed by a further increase next year of 1.4-2.0%. Strongest growth is expected to come from the private commercial sector where the key drivers will be office development and private finance initiative health and education work. However, latest new orders statistics place doubt on these figures being achieved.

Total new work orders obtained by contractors in the first seven months of this year are running at only 91% of last year's total. However, there is still some doubt about the consistency of the DETR's statistics since the introduction of a new computerised system of analysis early this year.

Orders in the private commercial sector are running at a level 6% lower than last year, despite the healthy-looking offices market.

New orders to July for offices were worth £2.2bn, 1% up on the same period last year. GVA Grimley forecast recently that rental growth in the office sector will average 5.6% a year over the next five years. DTZ Debenham Thorpe has reported a fall in office availability in eight regional markets for the sixth successive quarter. These factors should encourage pre-let and, provided they are in good locations, some speculative developments.

Retail construction is now spiralling downwards, as out-of-town developments come to a halt and town-centre ones remain subdued. Having been taken over by WalMart, Asda plans to increase its build plan, but it has not identified where, given the government's view on out-of-town schemes.

Boots The Chemists has revealed plans to open 160 new edge-of-town superstores over the next five years. Bearing in mind the current strict planning regulations, this may involve buying and refurbishing existing premises rather than building new ones. The plans are not expected to result in any increase in the company's annual expenditure. However, the sector as a whole will have been boosted by high street sales, where the latest quarterly growth rate was the highest for 18 months. The downside is that the high retail sales volume has only been achieved through heavy discounting.

The entertainment sector has generated enormous additional construction work over the past three years; new orders in 1998 were worth £2.24bn – more than double that spent in 1995. In the first seven months of 1999, growth has continued, but the value is up by only a modest 2% on last year's figure. The sector will no longer benefit from millennium- and other lottery-funded projects that are scaling down, but hotel, pub, restaurant and cinema operators are maintaining their development plans.

JD Wetherspoon, reporting a 30% rise in annual profits, announced plans to open up to 90 new pubs this year. Parisa plans to open at least 20 café bars around the UK in the next 12 months.

Health and fitness continues to be a growth sector. For example, LA Fitness, which owns several health and fitness clubs in London and the South-east, plans to open a further 17 clubs outside the region. A similar investment is planned by the Cannons Group, and Thistle Hotels has joined forces with 3D Leisure to develop health facilities at up to 30 of its hotels.

The budget hotel market has also shown strong growth in recent years, and Formule 1 of France and Days Inn of America have both unveiled plans to expand in the UK. Formule 1 intends to open at least one new unit every month in 2000. However, overall output in this sector is expected to start declining in 2001.

Other sources paint a healthier picture of growth than DETR statistics. The Chartered Institute of Purchasing & Supply's latest survey has recorded a rise in construction activity for the 10th month running. The Builders Merchants Federation reports a rise of 4.4% in materials sales than last year.

Other industry forecasters are even more bullish. Management consultancy Leading Edge predicts construction output to rise by 2.6% this year and by a further 2.2% in 2000, and even goes as far as to forecast that construction may benefit from sustained growth for the next 10 years.

If the output growth forecasts prove accurate, tender prices should continue to rise at a rate in excess of both retail prices and building costs. The upward trend in workload looks set to remain fairly steady, which should allow capacity to adjust and avoid unwelcome pressure on prices.

Nevertheless, tender prices over the next 12 months are expected to rise by 4-6%, and if output growth is maintained into 2000, prices are expected to rise by a further 4-7% until autumn 2001. Areas where activity is weaker are likely to see lower inflation (see table), however.

Building cost index

The building cost index rose 4.9% in the year to the third quarter of 1999, just below the rate of increase in the tender price index. After declining for three quarters, the index gained 5.9% in the third quarter, following the introduction of the last part of the Construction Industry Joint Council's three-year wage agreement from 28 June.

The rate for craft operatives rose 10% to £6.05 an hour; general operatives' rates increased 7.6% to £4.55 per hour.

From 2 August 1999 the holiday pay scheme, under which an employer previously had to buy a fixed-price weekly stamp for each employee, was changed to accommodate the EC Working Time Regulations. The regulations dictate that all employees receive holiday pay equivalent to their average take-home pay during the year. Whereas the old holiday stamps provided the cash equivalent to basic union wage rates only, the new system allows employers to pay funds into building and civil engineering benefit schemes that will provide the equivalent of an employee's average pay at holiday time.

The forecast for movement in the building cost index over the year ahead allows for a wage increase for building operatives next July in the region of 6%. Negotiations between unions and employers are unlikely to begin until the new year but a further substantial increase seems likely if the industry remains strong, as basic rates still fall some way short of actual site pay.

Materials

Materials price changes currently have little impact on inflation. The Office for National Statistics' construction materials price index shows that prices have fallen 1.6% over the past year. Most of this decline was at the start of the year, and, over the past six months, prices have remained fairly constant.

Following the interest rate rise in August, the pound rose sharply to the level reached last spring. Considering that the next movement in interest rates is likely to be upwards, rather than down, the pound should stay strong. So, commodities and other imported materials will remain cheaply available for UK manufacturers, and materials prices should generally not inflate.

However, oil prices have continued to climb rapidly since March and, at $24 a barrel, have risen nearly 150% in six months. The price rise has been driven by production cuts among the oil-producing countries that last month agreed to maintain the cuts for another six months. The price now seems to have stabilised, but it has affected manufacturing and distribution costs, and looks to continue to do so.

Plumbers' wage agreements

From 23 August, a new agreement consolidating tool allowances into hourly rates of pay, provided real increases of 6.1-6.5% for technical and advanced plumbers, 2.2% for trained plumbers, 7.9-11.9% for apprentices, and 1.7-3.0% for adult trainees. There was no increase in allowances.

Plumbers in Scotland received a 6% increase in basic rates from 9 August 1999.

Electricians' pay

A 30% wage increase over two years? The rate heralded in newspaper headlines is far from the truth. The employers' proposal is now in the hands of the unions. Proposed consolidation of travel allowances and the introduction of differential rates hide the real increase – an estimated 12-16% over two years. If an agreement is reached soon, the first part of the deal should come into effect on 7 February 2000.