Last year’s slight downturn in workload has reversed in 2006. But, says Peter Fordham of Davis Langdon, construction inflation can only keep growing as we gear up for the Olympics

01 — Executive summary

Tender price index

Davis Langdon’s tender price index shows that building prices in Greater London continue to rise. Prices rose by 1.5% over the previous three months and 5.5% over the last year. Prices are forecast to rise by 4.5 to 5.5% over the next year (for other regions see page 58).

Building cost index

The building cost index has risen by 4.8% over the year to the third quarter of 2006. Over the past year, materials prices (7.5%) have risen at twice the rate of labour costs (3.6%). Over the next 12 months, the overall rate of increase is expected to moderate to 3.9%.

Retail prices index

The retail prices index increased 3.6% over the year to September 2006. If RPI was still the government’s target index, the Bank of England would have to have written a letter of explanation. Inflation is not expected to start falling until next year.

02 — Trends and forecast

Construction prices have been influenced by conflicting pressures this year. Materials prices have risen even faster than they did in 2004 (see page 58); labour costs have been held in check by greater availability (see below); and at the same time demand for contractors and subcontractors has grown.

Government figures show that total construction output in the first half of 2006 was the same as in 2005 but the volume of new work was 4% higher, even exceeding the record level of 2004. Contractors’ new orders paint an even rosier picture, the value of orders in the 12 months to August being 10% higher than over the previous year.

In London, the construction industry has rebounded strongly: output figures show that there was 17% more new work activity in the first half of 2006 compared to the same period of 2005 (at current prices). New orders are massively up, although the figures are distorted by the inclusion of projects such as the £1bn Bart’s hospital redevelopment. Excluding that, the value of new orders won by contractors in London in the first six months of 2006 was still more than 20% higher than in 2005, with strong increases in activity in every sector. But offices have inevitably led the way.

As a result, the London construction market has experienced considerable cost escalation, although traditional labour rates may not have moved much. Like other busy areas around the country, it has seen noticeable increases in main contractors’ preliminaries and overheads and profit allowances, as well as materials-driven price increases.

Major concrete packages have seen significant price rises – a result of price increases for concrete and reinforcement materials and of demand on the larger industry players. Curtain walling tenders have seen upward price revisions, partly because of increases in aluminium and glass prices but also as a result of the market consolidation reported in last quarter’s Market forecast (28 July).

Another indication of the tightening market is difficulties in compiling subcontract tender lists, already a problem with cladding. Requests for extensions to tender periods are becoming common again. Main contractors are reluctant to tender on a single-stage basis so two-stage tendering continues to increase. Even office refurbishments are now often let as two-stage design-and-build.

The rapid inflation seen in some materials (steel, aluminium, glass, stainless steel, reinforcement) has led some contractors to seek fluctuations clauses. The alternative is often inflated prices to cover additional risk.

The present London market is very busy and order books are filling up for next year. It seems likely that this pattern may now be maintained right up until 2012. There may still be room for competitive prices in the mid-market but the players at the top end may already be in the driving seat.

Construction output in 2006 will reverse the slight downturn seen last year. Experian Business Strategies and the Building Cost Information Service both now forecast 3% growth in new work this year, followed by rises of 3.5% and 4% in 2007 and 2008. These are national figures: growth rates in London will exceed these percentages.

With softening commodity prices, materials price pressures next year should be far less than in 2006. Despite increased demand for manpower, a greater pool of labour may keep a lid on site rate rises. Nevertheless, sharply rising workload is likely to maintain inflation in construction prices. Over the next year, tender prices are forecast to rise by 4.5% to 5.5% in Greater London: any price risk will be on the upside. Strong commercial activity in the following year, coupled with the start of the run-up to the Olympics, is likely to fuel even higher inflation and price rises of 5% to 6% should be anticipated.

Hot topic

The tabloids might be whipping up fears of more east Europeans coming to Britain to find work, but it is good news for skills-hungry construction sites, says Peter Fordham

Two years ago, every construction industry survey identified shortages of skilled labour as one of the main difficulties facing the industry. Today it is rarely seen as a serious issue. The accession of eight Eastern European countries into the European Union in May 2004 enabled large numbers of skilled and unskilled workers to enter the country legitimately and work in industries such as hospitality and construction that were short of homegrown labour.

Data compiled by the Office for National Statistics indicates that average earnings in construction rose by 6% in 2004 and by 4.3% in 2005, but in the summer of 2006 the ONS registered an increase of just 1.1% over the last year. At the same time, private sector earnings generally have risen by 3.9% last year and 4.4% in the year to this summer. Average wages in manufacturing rose by 3.6% last year and 5.3% this year.

The latest round of industry wage agreements has been lower than in previous years. Plumbers, steel erectors and building and civil engineering operatives have all had to settle for increases of 3.5% this year, compared to rises of 6%, 4.5% and 9.5% respectively last year.

It is understood that the first year of the new settlement for heating and ventilating operatives will also provide an increase of 3.5% – after a rise of 5% last year – from the beginning of November (still to be ratified at the time of writing).

The government’s official report into the effects on the UK labour market of allowing access to the labour market of nationals from the eight new entry countries – the Accession Monitoring Report – showed that just 16,670 people (out of a total of 447,000 who had applied to join the Worker Registration Scheme) were working in the construction sector. Workers who are self-employed are not included in these figures and it was estimated that these might bring the total number up to about 600,000, including about 100,000 working in the construction industry.

Not all the new entrants over the last two years have come from the latest EU accession countries. Migration from outside the EU has also been running at record levels and it is estimated that 1.4m non-British people were given the right to live and/or work in the UK in the two years since May 2004, pushing the population above 60 million for the first time and creating a still larger pool of available labour.

The Access Monitoring Report reveals that 62% of registered workers are from Poland and, while their geographical distribution covers the whole country, the largest numbers are in East Anglia, London and the Midlands. Wales has the smallest number of registered workers.

It is no coincidence that labour rates in London and the South-east have shown little change over the last year, while rates in Wales have continued to rise in response to the busy construction market in South Wales.

The Accession Report identified that most of the employed construction workers were as unskilled labourers. The largest group of skilled workers were carpenters but significant numbers were also employed as bricklayers, painters, plant operators and steel erectors.

In London, carpenters are now cheaper to employ than they were 18 months ago.

Bulgaria and Romania will join the EU in January 2007. Although neither is as large as Poland, the population of Romania is higher than that of the other countries that joined in 2004.

Although the government has not yet decided whether to grant free labour market access to migrants from Bulgaria and Romania, the prospect exists for another significant influx of people to further swell the labour pool and restrain inflationary wage demands.

03 — Materials price update

Construction price inflation this year has been underpinned by sharply rising materials prices. DTI figures show that construction materials prices rose by 7.1% in the first eight months of 2006. Included in this is a 51% price increase for copper pipes, 24% for reinforcement, 11% for structural steel, 10% for coated roadstone and 8.5% for ready-mixed concrete.

Very few materials have escaped above-average price rises this year, due to higher energy bills. The Construction Products Association says a survey of its members revealed an average increase of 37% in gas prices and 42% in electricity prices over the past 12 months.

Despite falling wholesale energy prices, many manufacturers will still face higher prices over the next year as long-term contracts come up for renewal. Gas prices are expected to rise by a further 21% and electricity by 13% over the year ahead.


Oil prices, a great driver of inflation in construction and beyond, have been falling since the cost of a barrel of oil passed $77 in August. Since the end of September, prices have hovered around $60 a barrel, the level at the beginning of 2006.

This is good news for manufacturing and transport costs, and specifically for oil-related products such as asphalt and coated roadstone.

Economists and City forecasters remain conservative on future prices, generally predicting about $67 a barrel by the end of this year but declining to $62 a barrel by the end of next.


Steel prices fell in 2005 after 2004’s sharp hike but 2006 has brought more rises. Corus has increased prices four times this year, adding about £120 a tonne to structural section prices.

The British Constructional Steelwork Association estimates that fabricated steel prices will have risen by about 15% by the year end. This follows the trend of European prices in general. The BCSA reports that most member companies have good forward order books extending well into next year, but some analysts believe European prices may peak at the end of this year.


Metal prices may have come off their peak of May this year but remain stubbornly close to record highs. Since July, London Metal Exchange copper prices have hovered around $7500 a tonne, but are still almost double the price of a year ago. The impact has been mainly felt in M&E installations, demonstrated by the price rise for copper pipes and by cable costs, where the impact depends on the copper content within each type and size of cable, ranging from 10% on co-axial to 70% on more intensive copper multi-core cables.

Aluminium prices have fallen further from their peak in May ($3250 a tonne) and stabilised around $2500 a tonne between July and the beginning of October, although prices have edged up again since then. However, this represents a 33% over the average 2005 price and has been reflected in cladding and curtain walling prices.

04 — Regional outlook


The market here continues to be buoyant.

In central Manchester, Allied London’s Spinningfields development continues to dominate but large regeneration schemes outside the city centre such as Clayton Brook, Holt Town and the Chapel Street Regeneration Area are set to start in the coming months.

In Liverpool, a buoyant local marketplace is fuelled by substantial capital spend on the “new Liverpool” sub-region. With several key city-centre schemes on site and more in the pipeline, demand is high for site operatives and management and professional consultants.

The volume of large ongoing schemes in the region reduces the number of major contractors to seriously compete for new projects. Most large projects follow a two-stage design-and-build route. Interest in single-stage design-and-build schemes is very limited, except for simple sheds and the like.

As well as the high-profile city-centre redevelopments, there is significant spending on housing and education, although much of this work is now let through framework deals. Consequently, decent competition still exists for small to medium-sized projects using the right-sized contractors and where more traditional procurement methods can be used.

There remains a busy schedule of major new opportunities in the North-west, which means prices are likely to continue to rise at a faster rate than in most other regions.


Conditions here remain similarly favourable to contractors. Activity is high and compiling good competitive tender lists is still difficult. As elsewhere, many contractors will decline single-stage enquiries in favour of a two-stage process. Subcontracts such as concrete work and cladding can be difficult to secure on projects where easier opportunities may exist, although M&E services prices are competitive.