Q1 2014 has seen continuing steady growth in input costs with rises in brick, block and timber prices, and labour rates increasing in the capital.
- Worldwide factors
- Brick and block capacity problems
- London labour rates rise
- Sustained growth needed to increase workforce
The EC Harris/Construction News Contractor Input Cost Index of construction materials and labour rates now stands at 198 – virtually unmoved from Q4 2013, and only 0.8 per cent up on Q1 2013.
Source: EC Harris
Analysis of EC Harris market and survey data supports the expectation that construction workload will grow at a faster rate in the second half of 2014 and into 2015, which could potentially feed through to input costs.
Materials prices are in general continuing their steady rise in line with increased demand in the construction sector.
However, materials shortages and extended lead times are being experienced due to reduced manufacturing capacity since the peak of the last boom and reduced stock levels. Bricks and blocks are good indicators of this.
Global demand, especially weak demand from China, was cited for a fall in iron ore and steel prices. The EC Harris survey highlighted the fall in the raw material, with rebar down 3.1 per cent over the quarter, illustrating the effect of overseas factors on certain UK construction materials.
Concrete prices rose by 1.5 per cent in the quarter to stand at a national average of £79/cu m for supply only.
“The EC Harris survey found that large volumes of certain facing bricks were on lead times of up to 26 weeks”
Installed structural steel rose by 0.4 per cent. This price includes design, fabrication, site installation and overheads and reflects the reduced capacity in the UK steel contracting market since the peak of the last boom, together with steadily increasing demand.
The annual rise in structural steel prices is currently 5 per cent and its average price nationally is £1,525 per tonne.
The cost of installed structural steel is much more dependent on the UK construction market than the material price of reinforcement bar.
It is also worth noting that as structural steel is more extensively used in office developments, positive movements in prices are indicative of the recovery and growth of the commercial development market.
Brick and block capacity problems
A significant capacity constraint is being experienced for bricks, which continued to rise in price by another 4.1 per cent in Q1 2014 to stand at a national average of £245 per 1,000.
The EC Harris survey found large volumes of certain facing bricks were on lead times of up to 26 weeks.
This constraint will be particularly problematic in situations where for planning or aesthetic reasons there is little or no flexibility on the brick specification.
“The current trend for building quickly to meet residential sales demand is putting supply chains under increasing pressure”
Conversely, clients, designers and contractors who are able to maintain flexibility in design and material specification until as late as possible, and can change specifications at short notice, gain an advantage.
The current trend for building quickly to meet residential sales demand is putting supply chains under increasing pressure.
This could be eased if the general economic and construction sector confidence continues to grow, which could encourage materials suppliers to invest in increasing production capacity and build up materials inventories.
It appears that company buyers have done their jobs well in the first quarter, with published price list increases being well above the actual recorded change in price.
For example, rather than the double-digit rise proposed by builders’ merchants in the 2014 price lists, blocks saw price growth of 1.6 per cent over the quarter to March.
With the announcement in this year’s Budget that the Help to Buy scheme on new-build housing is being extended to at least 2020, we can expect to see house prices and demand for materials sustained for the near future at least.
In the buoyant market of London residential development, bricks, blocks and timber all saw rises above the national average, with quarterly increases of 9.6 per cent, 7.9 per cent and 13.3 per cent respectively.
London labour rates rise
The continuing strength of the residential market, together with increasing activity in other sectors such as commercial and infrastructure, is starting to affect labour rates, with notable increases in London.
Labour cost inflation is being driven by excess demand for the current supply, with resource and skills lost during the recession not yet fully replaced.
London saw a significant growth in average labour prices, with bricklayers increasing their rates by 4.2 per cent and carpenters by 5.4 per cent in the quarter.
“Labour cost inflation is being driven by excess demand for the current supply”
Over the year to Q1 2014, bricklayers’ rates were on average 6.9 per cent higher, while carpenters rates have almost recovered from their previous falls.
In London, a bricklayer can currently expect to receive an average £164 a day and a carpenter £155 a day, although higher rates will be experienced on certain projects.
A risk of further increases will be driven by a loss of resource capacity during the recession and a transfer of resource away from building construction projects to new growth sectors such as infrastructure.
Sustained growth needed to increase workforce
Having been through a number of difficult years since 2007, construction companies need to see sustained workload, more opportunities and increasing business confidence to prompt significant investment in growing their workforces.
Experience from previous recoveries shows an understandable time lag between increasing construction demand and construction company investment decisions to increase materials production, build up stock levels and expand the workforce.
This dynamic needs to be monitored closely to deliver increasing construction demand at affordable price levels.
Michael Richards is a senior research analyst at EC Harris