The profit margins of almost a quarter of UK contractors have fallen since January, as the credit crunch and rising materials costs begin to bite, writes Michael Glackin.

In its latest State of Trade survey, the Construction Products Association (CPA) reported that contractors’ tender prices fell for the second consecutive quarter during the first three months of 2008, and 24% of contractors reported a fall in profit margins.

Almost a third of contractors told the CPA that margins had fallen during 2007, although tender prices were marginally higher because of increases in the second and third quarter.

Noble Francis, the report’s author, said: “It’s mainly down to rises in raw materials and energy costs combined with a reduction in the amount of work around.”

Raw materials inflation is running at 6.3% as global demand continues to push up prices. Meanwhile, a number of large commercial developments have been put on hold or abandoned in the wake of the credit crunch.

The CPA said 14% of contractors reported a drop in overall output during the first quarter of 2008, the first fall in four quarters.

Private commercial work showed the greatest decline as half of all firms in the sector reported a decline.

Almost a third of contractors told the CPA that margins had fallen during 2007.

But 30% of contractors said public work on housing had increased, and almost 20% reported work in the education and health sectors had also increased.

Meanwhile, a report by the Building Cost Information Service (BCIS) said tender prices during the last quarter of 2007 increased 7.3%, compared with construction inflation of 4.3%, driven largely by rises in input costs including labour, plant and materials.

BCIS added that despite the wider economic problems caused by the global credit crunch, growth was likely to remain above trend this year.

The report said new output would continue to grow above trend in 2008, rising more steeply in 2009 on the back of continuing investment in public sector infrastructure projects.

BCIS added that new output was likely to ease in 2010 as public sector growth begins to slow.