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Costs continue to bite despite record-low inflation

Data suggests materials cost inflation has hit its lowest point since May 2011, so why are many contractors still struggling with rising prices?

Three volume housebuilders and one major commercial developer have released trading updates within the last fortnight – and across the board, all have said they expect build cost inflation to slow during 2016.

In its update for the six months to 30 September 2015, developer British Land said it was seeing signs that increases in construction costs were “moderating, reflecting lower raw material costs”.

“In central London, we are currently pricing in cost inflation of 5-6 per cent per annum and for our projects under construction all our costs are fixed,” the firm added.

Taylor Wimpey said that build costs had increased by around 5 per cent during 2015, but equally expected pressures to ease during the coming year.

Construction materials price index Jan 11-Sep 15_BIS

This view was also echoed by fellow housebuilders Barratt and Crest Nicholson.

Taylor Wimpey added that materials cost inflation had moderated from last year, and said that it had made investments in its materials supply chain to mitigate build cost inflation.

The statistics would appear to support the view that costs within the supply chain are stabilising.

Data from the Department for Business, Innovation and Skills suggests that materials price inflation, a major contributing factor to build cost inflation during the recovery, has dipped to its lowest rate since May 2011, with the majority of materials prices following a downward trend.

If these trends continue, input costs will see a consistent decline throughout the remainder of 2015 and 2016 – especially if the low-inflation environment in the UK is maintained.

But do the statistics tally with what contractors are seeing on the ground?

Deflation acceleration

The data from BIS shows that the construction materials price index for all work stood at 108.3 as of September (Index year: 2010 - 100).

This is the lowest level recorded for over four years. The last time that the index was lower was in May 2011, when it stood at 107.7.

Looking at the stats in detail reveals all work types have shown steady and consistent decline in the rate of materials inflation during the latter half of this year, and most are now well below some of the peaks recorded in 2014.

Construction materials price index by work type Jan 11-Sep 15_BIS

For housing, materials costs are now at their lowest point for two-and-a-half years. The BIS housing index stood at 108.4 for September, the lowest level seen since April 2013’s reading of 108.1.

Repair and maintenance materials inflation meanwhile is at its lowest point for more than three years, with the index at 107.1 for September - the lowest recorded since the end of 2012.

Equally, the rate of inflation for all new work aside from housing has steadily dropped since hitting a peak of 113.3 in February 2014, and stood at 109.3 in September 2015.

In theory, if input costs are coming down, that is positive news for contractors, so are they factoring this in for 2016?

“We continue to see some tenderers prepared to bid below sustainable levels”

Barclay Chalmers, McLoughlin & Harvey

Midas Group chief executive Alan Hope takes a different view, insisting materials costs are not falling, and that contractors will continue to see costs rise in 2016.

“Input costs for contractors have been going up, they’ve not been coming down”, he says.

“The one commodity that I can think of that’s been getting cheaper is steel – [with the] Chinese dumping steel on the market because they have a surplus – but on most other commodities there’s a lot of upwards cost pressure.”

Build cost pressure

Steel prices have slumped dramatically over the past two years, and as of September were 13 per cent lower than at the beggining of 2010, according to BIS data.

Cost inflation rates for other materials have shown some signs of slowing down, but are still some way above 2010 levels.

Prices for bricks, for instance, have moderated somewhat from earlier in the year, where prices hit a peak index level of 125.1. In September, prices had fallen to 122.2, but this was still the joint-third highest level recorded since 2010.

Construction materials price index by material type Jan 11-Sep 15_BIS

Source: BIS

Precast concrete, however, has seen prices increase steadily since 2010, with its index now at its highest level since the start of 2010, reaching 113.6.

Materials cost inflation is therefore far from uniform, suggesting cost pressures remain focused on in-demand materials.

And while the data might suggest that overall cost inflation is dropping, many contractors say that margins are still under pressure when it comes to build costs.

Managing rising input costs is still seen to be a key challenge for the industry in the year ahead, even if data is pointing to a slowdown in input cost inflation.

Mr Hope, like many CEOs, points to his company’s supply chain being well established, which helps to mitigate cost increases.

“We’re in the fortunate position of having a very loyal supply chain, so we have a bit of an edge in that when it comes to a shortage of resources,” he says.

Cutting margins

He adds that the first option to save costs is to innovate – but this is not always possible.

“When we can’t manage cost increases through innovation, then they get included in the price we charge upstream to the customer.”

McLaughlin & Harvey managing director for Scotland Barclay Chalmers agrees that rising costs are still eating into margins and that there are few signs build costs are easing.

“Margins are still under pressure and we continue to see some tenderers prepared to bid below sustainable levels,” he says.

But he attributes the build cost inflation not to pressure on materials, but pressure on labour prices and skills.

“Clearly a shortage of suitable people across the board is putting pressure on wages and salaries,” he adds.

“When we can’t manage cost increases through innovation, they get included in the price we charge to the customer”

Alan Hope, Midas

His view is backed by Innes Smith, managing director at Scottish housebuilder Springfield Properties, who is less sure than his counterparts at Taylor Wimpey that build cost inflation is set to fall.

“Currently there is a lot of pressure on both build costs and labour rates,” he says.

He adds that this is due to firms in Scotland “building out last year’s supply” of Help to Buy properties.

“I’d expect this pressure to ease as the Help to Buy funds are reduced.”

As far as build cost inflation is concerned, it appears to be another case of the official data saying one thing, and contractors saying another.

It may well be that top-line materials cost inflation is slowing down, but for vital commodities such as bricks, cost pressures still remain high.

Then there is the issue of increasing labour rates, which contractors have been struggling with for some time.

Whatever the data says at the end of the year, it appears that cost inflation will continue to be a concern for the industry well into 2016.

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