Contractors’ costs have increased by an average by 4.6 per cent over the past year, with EC Harris tender price forecasts showing price inflation passed onto clients has been subdued in most markets and only in London will prices have kept ahead of input costs.
- Steel price pressure
- Bricks leave sites at standstill
- Labour stats show day-rate spikes
- Housing slowdown offers opportunity
With contractors needing to improve margins and allow for risk, delivering projects won during the downturn at elevated price levels may prove challenging.
Labour inflation has spread further out into the regions during the third quarter, with rates increasing on average by 2.1 per cent.
Material price inflation has moderated, with increases in the cost of bricks and blocks being offset by cheaper rebar in some locations.
The EC Harris/Construction News Contractor Input Cost Index of construction materials and labour stands at 205, up by 4.5 per cent year on year.
Source: EC Harris
This is the second quarter of input cost inflation in excess of 4 per cent year on year, and is the highest sustained upward cost pressure seen since 2010/11 at the peak of the public sector stimulus spend.
Recent industry data has been somewhat contradictory. Output data suggests the robust growth seen in the past 12 months has ceased.
Residential has remained busy, but activity in the infrastructure and commercial sectors slowed. By contrast, the orders pipeline for commercial has strengthened while the housebuilding sector appears to be taking a pause for breath.
The latest Construction PMI survey published by Markit reflected very high levels of activity, with the index increasing to 64.2 in September from 64.0 in August, with any figure above 50 representing growth.
The PMI surveys over the past three months represent the strongest quarter ever recorded, though there has been a slight reduction in the previously high levels of confidence over future prospects.
Such sentiments may reflect the constraints on labour availability and delivery times for materials that continue to challenge the industry.
Steel price pressure
Slack global demand for steel has been in the headlines recently, evidenced by a rapid fall in the price of iron ore, down by 30 per cent to $93/tonne.
Evidence that low-price conditions are likely to be sustained well into the future is provided by Brazilian mining company Vale, which is making a huge investment in a fleet of giant ore carriers in order to minimise its transport costs and remain competitive.
Latest data from steel market analyst MEPS shows falling production costs have resulted in factory gate prices for steel sections falling by about 4 per cent during 2014.
In the UK, however, demand is increasing, erectors are in short supply and fabricators are striving to improve margins. Against this backdrop, installed prices of fabricated sections edged up in Q3 2014 by an average of 1.6 per cent.
Demand for reinforcement is also rising, but market conditions are more favourable for clients.
Similarly, demand for rebar increased by 3 per cent in 2013, but scrap metal prices have fallen as much as 20 per cent in the UK during 2014.
Concrete prices remained broadly unchanged in the third quarter to stand at a national average of £79/cu m for supply only.
Bricks leave sites at standstill
Bricks remain a source of capacity constraint and continue to be affected by significant inflationary pressures. Redrow chairman Steve Morgan has described sites as being at a standstill due to a lack of materials.
Common bricks increased in cost by 2.6 per cent in Q3 to stand at a national average of £258 per 1,000 – this represents an average 16 per cent increase in price over 12 months.
Waiting times of 20 weeks-plus have been reported by many respondents. Encouragingly, brick production in Q2 2014 was up by 20 per cent year on year, but stockpiles shrank by 25 per cent.
Ibstock has said it will produce an extra 125m bricks this year after it recommissioned a Leicester manufacturing site mothballed during the recession.
The UK looks like it is moving to a better balance in brick production in late 2014 – depending, of course, on the brick specification.
Block and timber prices have stayed stable during the third quarter and currently stand at an average of £7.50/sq m and £3.00/sq m respectively.
Labour stats show day-rate spikes
Over the past year, the EC Harris survey has pointed to scarce materials as being the key cost driver.
Industry statistics would support that data, with the Average Wage Survey from the Office for National Statistics showing construction earnings increased by less than 1 per cent in the year to June 2014.
However, the latest labour rate survey from EC Harris included a significant number of high day rates, suggesting the common anecdotal evidence of rapidly increasing day-rates is finally being converted into project cost inflation.
In the third quarter bricklayers’ rates increased by 3.5 per cent in Great Britain to average £167/day, while carpenters’ day rates rose 1.4 per cent over the same period to average £162/day.
The annual rate of growth was 6.2 per cent and 3.5 per cent respectively.
Average day rates for bricklayers in the range of £170/day to £180/day can be found in many regions including East Anglia, the South-east and Scotland as well as London.
Housing slowdown offers opportunity
Looking forward, the slowdown in the housing market may provide the industry the breathing space it needs to bring new talent into construction.
With fewer than 1,500 unemployed bricklayers currently claiming benefits, there is clearly little slack in the labour supply chain.
At the same time, the recent slowdown in the housing market suggests limits of affordability have been reached and there is less scope for input cost inflation in the future – particularly with interest rate rises on the cards.
This is likely to mean future labour cost increases will need to be driven by productivity improvements rather than just a supply and demand imbalance.
Highly productive, low-waste delivery will be essential if contractors are to avoid seeing their margins eroded further as they set out to deliver the final generation of recession projects.
Simon Rawlinson is head of strategic research and insight at EC Harris