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How contractors’ costs are rising

Evidence that the economic slowdown is hitting contractors in the pocket is growing, with more than two-thirds reporting that there has been an increase in construction costs during the past 12 months. By Ben Cook

A survey conducted by the Construction Products Association revealed that a total of 68 per cent of contractors had seen their costs rise in the past year. In particular, increases in the price of materials have affected the vast majority of contractors – a massive 82 per cent of respondents to the CPA poll said the cost of materials had gone up in thepast year.

Meanwhile, just over half – 54 per cent – of contractors reported that labour costs had increased. That said, raw materials price inflation has been the main driver of inflation in the construction sector, according to the CPA.

But it’s not just contractors who are suffering. Construction product manufacturers have also seen their expenses increase – a total of 81 per cent of construction product manufacturers quizzed by the CPA said their costs had risen in the last 12 months.

The escalation in the price of materials is one of the main reasons for the increase in product manufacturers’ costs, but there is another crucial factor. Rocketing energy prices have resulted in manufacturers having to spend considerably more money on bills than they have in previous years.

A total of 91 per cent of heavy side manufacturers surveyed by the CPA said fuel and energy costs had increased during the past quarter.

By exactly how much are fuel and energy prices increasing? Wholesale energy prices in the UK have, on average, risen by more than 70 per cent in the last 12 months, according to the CPA.

The wholesale cost of energy in Europe has also increased, but by nowhere near as much – prices hikes in France and Germany for example have reached 40 per cent. On average, UK electricity prices are 25 per cent higher than in Europe.

There is some consolation for the construction sector in that the situation is not expected to worsen – the forward wholesale electricity price for July 2009 is similar to the current level. But the forward price does compare unfavourably with Europe.

Meanwhile, companies with contracts that are due for renewal later this year face a 50 per cent increase in gas prices.

Rises in the UK price of diesel are also outstripping increases on the continent. UK diesel prices – excluding duties – have increased 36 per cent over the last 12 months, compared to a 25 per cent rise in Germany and a 21 per cent increase in France. The price of diesel – excluding duties – is 28 per cent higher in the UK than in Germany. UK diesel duties dwarf those in Europe.

Rising energy prices and pricier materials have led to a fall in contractors’ profits. More than half – 56 per cent – of those polled by the CPA said that their profit margins had fallen compared to the previous quarter. Meanwhile, tender prices, which had risen throughout 2007, are falling.

UK contractors are being left with a competitive disadvantage compared to counterparts in Europe, who pay considerably less for fuel and energy, while also paying less in fuel duties.

Unfortunately, this is a trend that is unlikely to change any time soon. With further costs increases, particularly in the price of gas, being anticipated, the industry, faces, in the words of the CPA, the “unwelcome combination of increasing prices and falling demand”.

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