In this quarter’s overview of the construction economy, Davis Langdon reports that output and orders are rising steadily for now – as are tender prices and materials costs. Plus, we hone in on another hot topic


Total construction output has increased every year since 1994, reflecting the trend of the overall economy. Between 1994 and 2003 the volume of work in the industry grew by 24% in real terms. Final statistics for 2004 are not yet available but early figures suggest the industry grew another 3.5%, taking the annual value of work above £100bn for the first time.

New work output eased slightly in 2000 and 2001 as the industrial sector began its retrenchment and private housing took a breather. But overall, new work output has grown 23% to 2003, with construction activity in 2004 increasing something like 7%, leading to steepening construction price inflation. In funding terms, the surge has come from private housing and public non-housing work – and it is primarily how these two sectors perform during 2005 that will determine whether the current size of the industry will be maintained. Signs suggest that the private housing market may begin to restrict, but government spending promises indicate that the public sector should more than compensate.


The volume of new orders obtained by contractors in 2003 showed a fall from the previous year, as the private commercial sector went into decline. However, orders in 2004 bounced back much stronger than most expectations with an increase in all new work in real terms of 7.5% (worth an additional £2.8bn). At the same time, infrastructure orders fell by a massive 25% but this was more than compensated by a resurgence in private commercial orders, 21% higher than in 2003. There was a near-doubling of privately funded health work, with a number of PFI hospitals reaching financial close, and a jump in orders in the entertainment sub-sector, including large contracts such as the redevelopment of Ascot racecourse and Arsenal’s new football stadium.

Tender prices

Tender prices in Greater London, as measured by Davis Langdon’s Tender Price Index, rose again in the fourth quarter, as materials cost increases passed down the line and activity and new orders began to recover from the 2003 dip.

In the rest of the country, construction growth has been pretty much unbroken for a number of years and, adding the rising material costs (led by the surge in steel prices) and labour rate rises (fuelled by an overstretched workforce), price rises have generally been higher than London.

Building costs

The notional Building Cost Index (a measure of the movement of nationally agreed wage rates and officially monitored materials prices) is forecast to remain at an annual percentage increase of 6.5% to 7.5% until the third quarter of 2006. The index reached this level in the third quarter 2004 as materials prices rose at an unprecedented rate. A wage increase of 9.5% on basic rates for building operatives this summer will keep the index rising at this pace.

Retail prices

The Retail Prices Index has crept up to register an annual increase of 3.5% in December 2004. Housing costs, particularly mortgage interest payments and depreciation, have driven the index up over the year but the consensus is that these factors will begin to wane over the coming year, such that retail inflation is likely to be in the region of 2.5% by the end of 2005.

Executive summary

  • Tender prices in Greater London started to rise in the second half of last year after remaining flat in the previous four quarters. Over the year to the fourth quarter 2004 prices rose 3.9%
  • Tender prices in the rest of UK have risen by 4% to 7% over the 2last year, driven by higher demand and rising material prices
  • The rate of increase in notional building costs rose to 7.3% over the year to 4Q04
  • Mechanical services costs rose sharply at the end of the year with both labour and material cost increases pushing the year on year figure to 6.8%
  • Electrical services costs rose even more, ending the year 8.7% higher
  • In the same period, the Retail Prices Index edged up to 3.4% and the Consumer Prices Index to 1.4%.