Fresh forecasts point to sharp tender price rises in the near term and materials gathering pace through to 2019, but predictions are positive over output growth.
- Steady rises in wages
- BRIC economies to blunt material price growth
- Ukrainian risk to oil prices
- Future of insolvencies still uncertain
Tender prices are expected to rise steeply for another year, according to the Building Cost Information Service.
The BCIS has forecast a 6.1 per cent rise this year, on top of the 7 per cent seen over the past year.
Rises of between 4.6 per cent and 5.3 per cent from 2015 to 2019 will mean tender prices will be about 26 per cent higher than their pre-recession peak by the start of 2019.
The forecast increases in the near term are expected to be caused by contractors struggling to handle rising in workload; growth will then level out as a result of firms getting to grips with the extra projects.
Input costs, such as materials and wages, coupled with rising demand will also push tender prices up from 2016 to 2019.
Capacity will exert a strong upward influence on tender prices in the short term, according to BCIS information services manager Peter Rumble.
Steady rises in wages
Wage settlements are predicted to climb gradually through the forecast – although by lower levels than tenders prices and very slightly or level with the Office for Budgetary Responsibility’s forecasts for RPI inflation.
But the actual amount construction workers receive may change by different amounts.
This is because BCIS’s figures are based on published wage settlements – such as the Construction Industry Joint Council (CIJC) – but not all construction workers are on contracts tied to these settlements and there are a large number of agency workers in construction, Mr Rumble explains.
Some workers who are in demand may even get more than the settlement level. If contractors are paying above the rates in publicly agreed pay deals, then that could make their profit margin look higher than it actually is in the BCIS research.
The hot housing market means bricklayers and carpenters are in demand, with 41 per cent of contractors reporting difficulty in recruiting bricklayers and 32 per cent have trouble hiring carpenters – figures which have risen sharply from below 10 per cent at the start of the year.
BRIC economies to blunt material price growth
Materials prices will also rise, more slowly than labour costs at first but gathering pace later in the forecast.
They are expected to grow by just 1.5 per cent this year because of weak growth in the price of raw materials. A slowing in economic growth among the BRIC countries – Brazil, Russia, India and China – has helped to mute materials price rises throughout the forecast period.
“Pre-recession China was going like a train and that affected steel prices,” Mr Rumble says. “It is not expected they will get back to that rate of growth within the next five years.”
While materials cost rises are becoming more moderate, this comes after price increases during the recession that contractors were generally unable to pass on to their clients.
Indeed, growth in materials costs ran ahead of the retail price index measure of inflation until the end of 2012, having lagged behind it from 1997 to 2006.
“Although contractors have not covered their costs during the recession, they probably more than did so beforehand,” Mr Rumble says.
However, contractors could not afford to continue to reduce tender prices and so they rose marginally over the past year, he adds.
Ukrainian risk to oil prices
Oil prices, which are often volatile and have a bearing on energy and materials costs, dropped 1 per cent between the third and fourth quarters of 2013 and 8 per cent over the year.
“From the pre-recession peak in Q4 2007 to Q1 2019, build costs are up about 35 per cent”
Peter Rumble, BCIS
BCIS predicts they will remain unchanged this year and rise by 4 per cent annually thereafter, although this always depends on the there being no major volatility in oil-producing countries.
The Ukrainian crisis could affect oil supplies if Russia, a major exporter, decides to restrict supplies or faces sanctions from other countries. The BCIS also expects modest increases in steel prices over the next year.
Building costs, which include plant, labour and materials, will rise behind inflation this year and then overtake it from next year until 2019.
“From the pre-recession peak in Q4 2007 to Q1 2019, build costs are up about 35 per cent,” Mr Rumble says.
Preliminaries are rising, which should indicate an improving market. They include the costs of setting up a site, such as security fencing, plant, phone lines and the clerk of works’ salary and sometimes profits, although not every contractor includes them.
The sample size for the fourth quarter of 2013 was relatively low, so the percentage preliminary figure for the quarter could change as more results come in.
In 2013 as a whole, the average level of preliminaries rose to 14.2 per cent from 13.9 per cent in 2012.
Future of insolvencies still uncertain
Sometimes the number of companies going bust rises at the start of a recovery. “It has been a problem in previous recessions,” Mr Rumble says.
“When you get an upturn some contractors and subbies go to the wall because they price something and then have to pay more for it three months later.”
However, the Insolvency Service data quoted in the BCIS report shows construction-related compulsory liquidations in Britain fell by 33 per cent in three months to the Q3 2013 and by 39 per cent compared with a year earlier.
But the data only runs to Q3 2013 – which was only the second consecutive quarter of construction output growth – so Mr Rumble says it “remains to be seen whether there will be increase” in insolvencies.
The BCIS expects growth in new work to be between 5.1 and 6.1 per cent per year through the forecast period.
It predicts growth in new housing will continue, particularly since homes built by private housebuilders that are later sold to housing associations for social housing count towards private housing output.
The private commercial sector is expected to recover steadily over the forecast period, with London office growth a key driver. Retail should also pick up as consumer confidence strengthens.
The BCIS predicts infrastructure output growth will also continue, with electricity and roads projects strong throughout. Rail projects are set to boost figures in the first half of the forecast, followed by water and sewerage projects further on.
The forecast shows construction will have suffered something resembling a ‘lost decade’ as new work output is not expected to not return to its 2007 pre-recession peak until 2016.
After that, new work is then expected to grow by around 18 per cent in total through to the end of 2019.