Construction costs to fall by nearly 5 per cent during next 18 months as contractors reduce margins to compete for work
Construction costs will continue to drop in the UK throughout this year and next, with tender prices falling by a much greater margin.
Rider Levett Bucknall’s January 2009 International Construction Cost Commentary predicted construction outturn costs would fall on average by about 4 per cent in 2009 and a further 0.5 per cent in 2010. But RLB said tender prices would fall more significantly due to increased competition and the volatility of the market.
The latest BCIS-published UK tender price data predicted falls of 7 per cent and 3 per cent respectively for 2009 and 2010. But RLB said they would fall by up to 10 per cent in some instances, and it has even tracked recent tender price reductions of more than 20 per cent.
The biannual ICCC uses global cost data to derive indexed measures of relative costs of construction within and between markets.
RLB partner Ian Sandland said: “Our documents track and forecast tender prices in an increasingly volatile market. We predict that there will be wild swings in tenders received, influenced by the long-term, allround solvency of all members of the team and the sector in which the project is placed.
“What is vitally important for us and our clients is that we look at not just tender prices but likely out-turn and wholelife cost. We achieve this with a series of robust tests on all tenders received.”
RLB’s report, which charts tender price index movement for cities from around the world between July 2008 and January 2009, found that two-thirds of cities had zero or negative tender index movement. In 2009, New York, London and Honolulu will be the most costly cities in which to build, it predicted.
But RLB forecasted that all in tender price levels in London would decrease by between 2.5 per cent and 5 per cent during 2009 and up to 2 per cent in 2010.
Bristol is the second most costly city to build in the UK followed by Manchester, Birmingham and Sheffield, all more expensive than Dubai.
Sheffield has seen the biggest contraction in construction costs in the UK: a 4 per cent decrease between July 2008 and January 2009. Commercial construction has all but stopped in Bristol since the completion of developments such as Cabot Circus in Bristol City Centre.
Hammerson’s Sevenstones retail development, which will provide 860,000 sq ft in the heart of the city centre, has been delayed until at least the fourth quarter of 2009.
RLB forecasted that materials prices would also fall, driven by a sharp reduction in worldwide demand. But due to the decreasing value of sterling, the full effect of the reduction in material prices would not be realised in the UK.
RLB said a reduction in margins by contractors and subcontractors to secure work cannot be sustainable in the long term.
It would result in a reduction in the contract market if the economy and workloads did not improve in the near future.
On the upside, the fall in tender prices would provide clients and developers with a chance to procure projects at lower cost and get them off the ground.