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BCIS and EC Harris disagree on pace of tender price rises in latest quarterly forecasts

BCIS forecasts tender price rises to come sooner and steeper than EC Harris as volatility remains despite improving sentiment.

As the sentiment of cautious optimism for the year ahead continues to spread, the latest tender price forecasts from Building Cost Information Service continue to edge upwards.

However, the predictions make it clear that the industry is not yet out the woods.

Separate research conducted by EC Harris reveals a more cautious outlook as the prospects for recovery across the construction industry do not appear to be evenly spread throughout the various sectors.

BCIS tender price forecasts Q2 13

Source: BCIS

Over the 12 months to the second quarter of 2014, the BCIS forecasts tender prices to increase by 2.6 per cent, followed by a rise of 3.4 per cent in the year to Q2 2015 and of 3.7 per cent up to the second quarter of 2016, according to the organisation’s latest Quarterly Briefing.

“Contractors cannot take any more and have got to push prices up”

Peter Rumble, BCIS

Tender prices increased by 5.6 per cent in the year to Q1 2013, indicating that the previous quarter, which was previously thought to be a “blip”, is more likely to represent the fact that tender prices have indeed bottomed out as far as they can go.

The last briefing posted a growth in tender prices of 6.4 per cent in the fourth quarter of 2012 compared with the previous quarter.

Further gains expected

BCIS information services manager Peter Rumble says that continued improvements to tender prices are expected.

“Contractors cannot take any more and have got to push prices up,” he says. “But the [tender price increases] will settle down.”

“The commercial sector is generally one of the last to react to an improving economy”

Peter Rumble, BCIS

Longer-term prospects are promising, however, with the BCIS forecasting tender prices to be 17 per cent higher in 2017 than the 2007 peak - buoyed largely by the latter years of the five-year forecast period.

Indeed, a survey of contractors undertaken by the BCIS reveals that none of the respondents expect a decline in tender prices, with most, on balance, expecting to see some growth.

Building cost rises

While overall building costs will see an increase over the forecast period, this year they are set to grow by a below-inflationary rate.

The BCIS forecasts general building costs to rise by 1.9 per cent in the year to Q2 2014, followed by increases of 2.8 per cent in the 12 months to Q2 2015 and of 3 per cent in the year to Q2 2016.

BCIS building costs forecasts Q2 13

Source: BCIS

Materials costs are not expected to have a huge influence on tender prices over the period.

However, Mr Rumble warns that “if we have any oil price shocks, that could lead to higher materials prices, which will have a stronger effect on those working in the infrastructure sector”.

Meanwhile, an upturn in demand for work across the construction industry will rouse wage inflation, which has remained depressed throughout the majority of the downturn.

Infrastructure to drive growth

Infrastructure remains on course to be “star” industry sector in terms of driving wider growth.

“The intention is there [from the government] to do something with infrastructure,” Mr Rumble points out.

“Private housing is of course expected to grow and the industrial sector is expected to do reasonably well, with moves emerging across much of the country for logistics and distribution warehousing.”

BCIS new work assumptions Q2 13

Source: BCIS

Commercial activity remains a concern, however, with the BCIS forecasting that the sector will remain in recession over the next two years.

“The commercial sector is generally one of the last to react to an improving economy, being led by consumer sentiment and business confidence,” Mr Rumble says.

The latest Market Report from EC Harris meanwhile forecasts tender prices to stabilise in the 12 months to Q1 2014, with an expected contraction of 0.4 per cent before an increase of 3.3 per cent in the year to Q1 2015.

Regional divide remains

As is to be expected, the outlook is slightly more positive for London than for the rest of the country, with an increase of 0.7 per cent forecast in early 2014 before accelerating to an average rate of 4 per cent growth.

Infrastructure tender prices are also expected to outpace those for general building, with EC Harris forecasting a 2 per cent rise in the year to Q1 2014, and 3.4 per cent in the year to Q1 2015, owing to the stability of the sector through major projects, primarily rail.

But the EC Harris report notes a disappointment around a lack of a short or medium-term kick-start to infrastructure investment.

“The recent profit warnings from major contractors serve as continuing confirmation that the market is tight”

Simon Rawlinson

EC Harris head of strategic research and insight Simon Rawlinson says that there has been little change in the company’s position regarding how tender prices will fare over the coming years, compared with the previous quarter’s report.

“There are some signs of a change in market sentiment, but it has not converted into sector-wide activity in either London or the regions,” he says.

“The recent profit warnings from major contractors such as Balfour Beatty and Morgan Sindall serve as continuing confirmation that the market is tight, but that contractors are being selective in the projects they bid for.”

The EC Harris report highlights the difficulty of predicting tender price movement given the current market conditions across the industry.

Similarly, the BCIS highlights the volatility of tender price movements and the “up and down scenario” across its index, which it says are a result of a market that is characterised by deflated market demand and cost pressures.

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