Labour shortages and workload growth pushed tender prices up 1.8% in the first quarter of 2000, and the upward trend is set to continue. by Davis Langdon & Everest
Construction tender prices are continuing to rise as demand stretches supply. In the first quarter of the new millennium, prices were up 1.8% on the last quarter of 1999. They have risen 5.8% in the past six months and the building cost index has hit a new high of 348 – three points up on its previous peak, achieved in November 1989.

The increase is largely caused by demands on labour forcing up site rates. In most regions of the country, good tradesmen command much higher rates than they did this time last year. In London, bricklayers will expect £120 a day, 20% higher than six months ago and 40% above the going rate at the end of 1998.

Even at the end of last year, according to the Construction Confederation’s Construction Trades Survey for the fourth quarter of 1999, 79% of contractors nationwide reported difficulties in hiring bricklayers. Particular problems have been reported in the South, the Midlands, East Anglia and parts of Scotland.

The Construction Confederation survey also identified a surge in demand for plasterers and plumbers at the end of last year. However, plastering rates have increased by only 4% over the past year: the national average for two-coat Gypsum plastering is £6.50/m2, compared with £6.25/m2 a year ago.

A London Chamber of Commerce study recently found that two out of three firms in all fields of industry were struggling to find the right workers. In the construction sector, the shortage of managers is also seen as a growing problem. Labour shortages and resultant higher wage rates will not go away, as workload growth is forecast to continue. The Construction Industry Training Board recently published a forecast of employment in the industry, predicting that a further 69 000 directly or indirectly employed operatives would be required by 2004, even allowing for a 13% increase in productivity.


The drive behind rising tender prices has been the steady growth in output. The DETR’s total construction output figure for 1999 – £65bn – represented the culmination of four years of steady growth, with 8% more work undertaken in the industry than in 1995. New work (as opposed to repair and maintenance) rose 15% in 1995-99. Last year alone, new work output was 4% up on 1998, although there was a fall in repair and maintenance work. At current prices, £2.8bn in additional new work was undertaken last year, of which 71% was in the private commercial sector.

All of the major forecasting bodies predict continuing strong growth in construction activity for at least the next two years. Construction Forecasting and Research thinks that the volume of activity by the end of 2001 will be 4.2% higher than last year. The Construction Products Association is even more bullish, predicting that output will be 5.5% higher. However, the emphasis may shift from the dominant private commercial sector to housing, public sector and repair and maintenance work.

New orders

Despite optimistic predictions from Construction Forecasting and Research and the Construction Products Association, the DETR’s new orders figures highlight a more worrying trend for the industry. The total value of new orders obtained by contractors in 1999 was 9% lower than in 1998 and less than the annual total in both 1997 and 1996. The private commercial sector registered the most significant fall (down 9% on 1998, with orders worth £423m less at current prices). Other sectors fared worse in percentage terms – private industrial was down 14% and private housing fell 12% – but both represent less money to the industry (£393m and £170m respectively).

Private commercial orders

The decline in private commercial orders was led by the retail sector, as predicted in the last tender price forecast (11 February). Until last year, the supermarket chains regularly filled the top 10 lists of building clients. J Sainsbury still commissioned £380m of work last year, but none of the other major retailers made the top 20. Planning restraints on out-of-town developments and the phenomenal growth of e-commerce mean traditional retail outlets face an uncertain future. In the USA, it has been predicted that the Internet may make 15% of retail space redundant by 2005.

The value of new orders for offices grew but, in real terms, there was a slight decline. Nevertheless, output for the whole commercial sector is thought likely to rise 4-5% this year, thanks to the growth in private finance initiative health and education, before stalling in 2001.

What does the budget mean?

The 21 March budget had little apparent impact on the construction industry, but the chancellor’s increased emphasis on public spending for health and education may help to fill the gap left by declining commercial and industrial work.

The chancellor also announced an extra £280m for a range of transport schemes, including by-passes and road widening. However, the greatest hope for the civils industry is still Railtrack’s spending programme. The company recently announced a 12-year £52bn spending programme with £18.5bn earmarked for 2001-06, although truly committed schemes are reckoned to be worth about £3bn.

The chancellor has forecast gross domestic product growth of 2.75-3.25% for 2000, followed by rises of 2.25-2.75% in 2001 and 2002. Such economic prosperity bodes well for the construction industry.


If the industry’s overall output continues to grow as predicted by Construction Forecasting and Research and the Construction Products Association, supply constraints seem certain to keep inflation ahead of Gordon Brown’s general target of 2.5%.

Materials prices may begin to increase for the first time in three years as raw materials prices rise; labour costs will continue to be the principal driver behind overall costs, but the whole supply chain will be able to gently raise profit margins if workload permits. Tender prices are forecast to rise 5-7% in the 12 months to the first quarter of 2001, and 4-6% in the following year.

How the indices are calculated

Mechanical cost index The MCI is based on labour rates agreed by the mechanical industry’s wage body, the JCCHVDEI, and materials prices from the Office for National Statistics. Electrical cost index The ECI is compiled from materials data from the Office for National Statistics and labour costs agreed by the electrical industry’s wage body, the JIBECI. Building cost index The BCI measures movement in contractors’ labour and materials costs. It is compiled from nationally agreed labour rates and materials prices from the Office for National Statistics. Tender price index Davis Langdon & Everest’s TPI is compiled by an analysis of successful building tenders worth more than £250 000. It includes movement in wage rates, discounts, plant costs, overheads and profits.

Building cost index

The building cost index rose 5.8% in the year to the first quarter of 2000. Office for National Statistics data shows that construction materials prices rose just 0.3% in the year to February 2000. Despite increased housing starts, housebuilding materials prices rose just 0.2% over the year. In February, British raw materials costs showed their largest annual rise in 20 years. This was almost entirely caused by the jump in oil prices to more than $30 a barrel, a level last seen in 1982. In the year to February, oil prices rose 170%, the largest annual rise since records began in 1974. Prices have since fallen back and the OPEC countries have now agreed to increase production, so the price may fall further still. At the end of March, the price had slipped to $24.50 a barrel, still 140% above the price in December 1998. Coupled with the chancellor’s increase on duty, higher fuel prices will result in higher manufacturing and distribution costs that will be passed on if market conditions permit. Wage negotiations are taking place to agree a new building and civil engineering industry settlement to supersede the current three-year deal, which ends in June. In response to the unions’ initial demand for £10/hour for skilled workers, the employers have offered a 12% increase spread over three years to take the rate to £6.80/hour by 2002. Further adjudication is obviously required. Engineering construction workers have now agreed a 5.4% increase in basic hourly rates with corresponding increases in fixed bonuses on larger nominated sites.

Mechanical and electrical cost trends

The mechanical cost index rose 2.2% in the year to the first quarter of 2000. Materials costs fell 1.8% in the year to January 2000, largely in response to the impact of the pound on the cost of imported components and raw materials. However, prices fell at the beginning of last year and have risen 1.5% since the middle of 1999. This trend may continue as mechanical component suppliers have faced large price hikes for aluminium, copper and refrigerants. Electrical costs rose 4.2% in the year to the first quarter of 2000. Electrical materials costs fell 0.5% over the year to January, but, as with mechanical materials, have edged upwards since summer 1999. Copper is 16% dearer over the year and plastics, 18% up. Materials manufacturers and suppliers will be under pressure to pass these costs on to their customers. The first part of a new two-stage wage agreement came into effect on 7 February 2000. This included a substantial restructuring and the introduction of three different wage bands. Overall, workers’ pay increased about 6%. The mechanical and electrical services sector has experienced considerable increases in demand over the past couple of years. Consequently, the past 12 months have seen labour shortages, particularly of electricians, in hotspots such as London and Edinburgh. Subcontractors’ estimating departments are busy and requests for extended tendering times are common. In some areas, such as parts of East Anglia, it is becoming difficult to get M&E subcontractor prices in conventional tendering. M&E tender prices over the past year have risen in excess of 10% where workload is buoyant.