Tender prices continue to soar as oil and steel costs increase

Strong demand for construction and the rising cost of raw materials have hiked up tender prices by 7.5% on last year, according to figures published by the Building Cost Information Service (BCIS).

The BCIS quarterly survey of tender prices demonstrated that, although there was a 4% fall in tender prices in the first quarter

of 2005 compared to the previous quarter, prices had risen by 7.5% compared to a year earlier. BCIS also expects tender prices to rise in the coming years and continue to outstrip inflation.

Andrew Thompson, general manager at BCIS, said: “It may be that tender prices have dipped slightly because the market eased in steel, which would have eased input costs, and labour from Eastern Europe has improved labour availability. However, the underlying tender price trend is upwards and construction prices always rise faster than inflation when there is strong demand for construction.”

The BCIS survey found that the general building cost index had risen by 7.3% during the first quarter of 2005 compared with

last year. Material costs rose 8.3% during the same period, while nationally agreed wage rates rose 5.6%. But new orders for construction fell by 2% compared with the previous quarter and by 6% compared with the same period in 2004.

Construction prices always rise faster than inflation when there is strong demand for construction

Andrew Thompson, BCIS

Milan Khatri, chief economist at the RICS, said recent sharp increases in the price of oil together with a steady increase in demand for construction, despite the dip in the number of new projects, would continue to put pressure on construction costs. He said: “Oil has continued to go up in price and steel is still quite high too, so price inflation in raw materials means that the tender price index is set to carry on rising.

“As for demand for construction, it can be difficult to ascertain exactly how the sector is doing. Although the BCIS figures, and DTI figures, show that demand is slowing, according to ONS (Office of National Statistics) figures, the sector has grown by 2.8% in the last quarter. It also appears that the level of public sector investment spending is set to increase over the next year as large projects finally come out of the pipeline.”

But Khatri said there were signs that wage growth was slowing: “Wage growth isn’t as rampant as it has been in recent years and overall we know the UK labour market is not as strong as it was two years ago. The general, if slight, increase in unemployment and a slight slowdown in economic growth means that wage growth in construction has also slowed.”

BCIS forecasts tender prices to rise by two and a half times the rate of inflation over the next five years, an increase of 32% against a backdrop of 13% general inflation. BCIS’ Thompson suggested that factors such as the 2012 Olympics could drive up construction demand and costs in the next few years. But he added that the exact impact of the Games would depend on the completion dates of other large projects. “It all depends on the start-up time of large projects and the extent to which they overlap,” he said.