Construction tender prices rose again in the second quarter of this year, and by much more than the general level of inflation. The retail price index for May registered a year-on-year increase of 1.3% – the lowest annual figure for six years. In contrast, building tender prices have shown an increase of 3.8% in the past six months and are 5.8% higher over the year.
The provisional tender price figure for the first quarter of 1999, reported in the April forecast (23 April, pages 82-84), has been revised upward from 323 to 325. The provisional figure for the second quarter, based on an analysis of competitive tenders received, is 330 – up 1.5% on the previous quarter.
This movement reflects strong order books and a renewed confidence in the industry’s medium-term outlook. It is at odds with the DETR’s analysis of new orders published in April, which showed a sudden drop in volumes for December to February. At the time, there were doubts over the accuracy of the figures following the introduction of a new computer system; the DETR has now revised those figures but they still show a 15% fall in orders for new work for those three months, compared with the average order level of 1998.
In retrospect, it is clear that the decline in orders confirmed the air of pessimism about the economy that was prevalent in the run-up to Christmas.
This resulted in developers and owner-occupier clients putting their plans on hold. However, since Christmas, most thoughts of recession have been banished, confidence has returned and development has resumed. This recovery is reflected in the DETR’s provisional new orders figure for March of £2.70bn at constant prices, which was beaten only once during 1998.
Construction output rose for the third consecutive year in 1998, and the value of new work was 10% higher in real terms than in 1995. As a result, the amount of new construction work being undertaken in the UK last year was 3% higher than in the boom year of 1990. However, repair and maintenance has failed to match this level of growth: expenditure is 10% lower than in 1990.
Overall, the volume of work in the industry was still 3% lower than in 1990, but it was delivered with a much smaller workforce. In 1990, 1.8 million people were employed in construction, compared with 1.4 million last year. Output per worker has increased 24% and productivity in the first quarter of this year maintained the level of 1998.
Other data sources confirm a continuing growth in workload. Builders merchants’ sales for April and May were 4% higher than the same period in 1998, and the latest Chartered Institute of Purchasing and Supply survey showed that construction activity in June rose for the fifth month running, reaching its highest level for two years.
Construction Forecasting and Research and the Building Material Producers have both increased their construction output forecasts from those made at the end of last year.
Both forecast a growth pattern that will take the industry’s output past the 1990 level by mid-2000.
In 1999, both organisations forecast the strongest growth to be in the private commercial sector. Output in this sector grew 43% between 1995 and 1998, but was 11% lower than in 1990. CFR forecasts 8% growth this year, followed by a further 3% increase in 2000. However, comparisons are no longer totally valid as the figures now include privately funded education and health work in the private commercial sector, which is expected to increase its momentum this year and next.
Since these forecasts were made, all the economic signs have been favourable. The latest Dun & Bradstreet survey shows a marked increase in confidence across all sectors of British industry. Other sources show that the manufacturing sector has expanded for the first time in 15 months, helped by rising domestic demand, and that retail sales in June grew at their fastest rate for more than a year.
Similarly, house prices continue to rise: in June average prices increased 1.8%, according to the Halifax. All these statistics are driven by the trend of UK interest rates, which, following the June quarter-point cut to 5%, are now at their lowest level for 22 years.
Six months ago, as private sector confidence dipped, hopes for continuing growth in construction workload appeared to rest on the much-heralded education and health sectors. But it seems that the next round of forecasts will see projected output for 1999 and 2000 edge upwards.
On current forecasts, new work output in 1999 is predicted to be an average of 2% higher than last year, with a further increase of 2.2% in 2000. Add repair and maintenance and the overall increase between 1998 and 2000 is an average of 4.8%. At today’s prices, this represents a rise of some £3bn.
The question is, can the industry cope with the continuing expansion in workload without experiencing further inflationary pressures? Materials supplies do not seem to be under pressure and manufacturers are still benefiting from historically low raw materials costs.
Price rises may be driven by increasing labour costs. In May, Building reported that the rush to complete projects before the new millennium was pushing up London plasterers’ rates to £120 a day (14 May). Bricklayers have also benefited from wage growth over the past two years, and an increase in new housing (the BMP predicts a 7% rise over the next two years) will lead to further demand-led price increases.
Concrete work, finishings and brick/blockwork trades have underpinned the increase in tender prices in the first half of this year. Outside London, typical plastering rates have reached £6.50/m2. Fifteen months ago, the average rate was about £5.50/m2. This represents an increase of 18% at a time when construction prices generally have risen 8%.
Our forecast for tender price inflation between the second quarters of 1999 and 2000 is for a rise in the range of 3.75-5.75%. Unless post-millennium blues set in, projected workload is likely to push prices up by a further 4-7% the following year.
Building cost index
The building cost index rose 2.8% in the year to June 1999, even though it showed three consecutive quarterly falls since the third quarter of 1998.
The slight downward trend at the end of 1998 and the beginning of this year follows an easing of materials costs. According to the Office for National Statistics, construction materials prices fell 1.5% between June and December 1998. The provisional index for June 1999 shows that prices have fallen a further 0.4% since December. Housebuilding materials prices have declined, at a slightly slower pace, by 1.4%, over this period.
In general, UK industry raw material costs have been in gradual decline since mid-1995. ONS figures show that the costs of materials and fuel purchased by manufacturing industries other than food, beverages, petroleum and tobacco have fallen 19% from mid-1995 to May 1999 – largely as a result of the strength of the pound and lower commodity prices. Some stability appeared in the second half of last year, but the index has fallen a further 3.9% since December last year.
However, the cloud on this particular horizon could be oil prices. The average oil price in 1998 was lower than in any of the preceding 25 years. This trend reversed in March, with prices jumping from below $10 a barrel back up to $18 in just four months, as oil-exporting countries seem to have been successful in agreeing limits on production.
The 0.7% reduction in the building cost index between the first and second quarters of 1999 was more to do with the change in the structure of National Insurance contributions that came into force on 6 April. The same amount of revenue will be collected, but employer’s NI contributions are reduced for most lower paid workers. As a result, “all-in hourly rates” for most construction workers went down.
Average industry pay last year was £310 a week, according to the ONS. An employer’s NI contribution on this salary fell on 6 April from £31 to £27.69 a week.
The third-quarter forecast for the building cost index shows a 5.4% rise over the second quarter. The third (and last) part of the Construction Industry Joint Council’s three-year wage agreement came into effect on 28 June, pushing the basic craft rate up 10%, to £6.05 an hour; general operatives got a 7.6% rise.
Over the three-year period, the craft rate has risen by 32% and the general operative rate by 20%, in an attempt to bring rates closer to those for sites. However, with last year’s average gross hourly earnings for construction trades at £7.13 (excluding overtime), there is still room for the margin to narrow as talks on a new national pay deal are due to start any moment now.
On 14 June, pay rates under the Building and Allied Trades Joint Industrial Council were brought into line with CIJC rates. For craftsmen, this meant an increase of 12%, whereas general operatives’ rates rose 9.6%.
Further changes come into effect on 1 August as the Inland Revenue replaces subcontractors’ 714 self-employed tax status with three certificates, dependent on eligibility for payment net or gross of tax. A new responsibility, enforceable by a fine, is being placed on the contractor to ensure that the subcontractor has the appropriate certificate.
The Revenue estimates that about half the 400 000 holders of the 714C certificate will not qualify for the new CIS5 and CIS6 certificates, and will have to pay tax at source. The onus for collecting this could fall not only on contractors, but also on clients that directly employ subcontract/self-employed labour. Labour costs could also rise as more operatives are forced to pay tax at source.