Olympic build-up will counter UK construction industry slowdown

Although the construction economy has slowed this year, experts are predicting it will pick up during the next two years. Building tender prices are also due to go up, spurred by a growth in workload and a lack of skilled workers.

Construction output in the first quarter of 2005 showed no change compared to the previous quarter and was 2% lower than the first quarter of 2004, according to a new report from EC Harris. Overall, it is expected that activity will increase by only 1.3% in 2005. However, activity will step up a notch in the coming years, to 2.1% in 2006 nd 4% in 2007, said the report.

Paul Moore, head of cost research at EC Harris, said the London Olympics would play a key role in getting the construction economy into gear. He said the Olympic work would add 1.5-2% to construction workload in the South East between 2007 and 2012.

He said: “Before we won the Olympics the expectation was that the general economy would slow down in 18 months and the construction industry would follow. But now the Olympics work is due to start in about 18 months to two years, which is exactly when it will be needed.”

The extra workload is likely to bump up building tenders by 1-1.5% from mid 2007 onwards, according to EC Harris’ Autumn 2005 Economics Survey – UK.

Tender prices will rise nationally by 4% in the year to the third quarter of 2006 and by 3.4% the following year, the report said. London is due to heat up particularly, with tenders up by 5.7% over the first year, rising to 5.3% in the year to the third quarter of 2007.

Tender prices for infrastructure works will be another hot spot, with rises of 4.7% expected next year and 5.1% the following year. Of the £10bn earmarked for Olympics building projects, around £8bn will be spent on roads and railways. Moore said that although this infrastructure work will happen in the South East, the materials needed for it would be procured on a national basis, so price inflation would be felt across the UK.

Sometimes we put out an invitation to tender and we don’t get many responses

Paul Moore, head of research, EC Harris

Tenders more generally will be pushed up by the plentiful workload, which will continue to allow contractors to be choosy about the jobs they accept, according to Moore. “Sometimes we put out an invitation to tender and we don’t get many responses,” he admitted. A lack of skills in the industry is thought to compound this problem.

Moore added that tender prices would vary widely across different regions within the UK (see chart). Tender prices are lower in areas such as Northern England and Northern Ireland, where they are expected to remain relatively low into 2007. London will continue to have the highest tender prices both in 2006 and 2007. Tender prices for civil engineering works are forecast to rise by 4.7% and 5.1% over those years.

The public sector will be at the forefront of growth in the construction industry, according to a bulletin from Franklin + Andrews that also looked two years ahead. It said the public housing building sector would be the strongest growing area within the industry, increasing by 16% in 2005, 13% in 2006 and 10% in 2007.

The public non-housing sector would also remain positive, with predicted growth of 3.8% in 2005, 5.3% in 2006 and 4.7% in 2007, according to the report.

The strength of the PFI system is likely to boost private commercial output, with F+A predicting output growth of 4.5% in 2005, 3.8% in 2006 and 5% in 2007.