Building costs impact on construction industry

The GVA Building Cost Update report provides a timely reminder of the continuing impact of the economic downturn on the construction industry. 

Twelve months ago, development activity (and hence construction activity) in the commercial, industrial and residential sectors was increasing, albeit from a very low base, on the back of a modest increase in capital values.  However, with weaker economic growth and static capital value increases, this increased development activity has ground to a halt.  With a weak economic and property market outlook, and with development finance still severely constrained, it is unlikely that there will be much change in the amount of development activity over the next year or two.

Past performance indicates that a downturn in development and construction activity should lead to a fall in tender prices and this is something which is being closely monitored by GVA.  However, the general trend in tender prices has been upwards since Spring 2010.  The Building Cost Information Services (BCIS) records this trend and forecasts that it will continue throughout the year, though this is being lead by the demand for London offices and the remainder of the country will be constrained by the lack of work and could well see further falls.

Material prices have shown strong growth since the beginning of 2010 and this has continued in 2011.  According to BCIS, annual price rises in material products peaked at 8% per annum in early 2011, though have now moderated to approximately 5%.  The price rises are predominantly due to rises in steel prices, as manufacturers have passed on the increases in raw material commodity prices.  Other construction products to see double digit price rises over the past 12 months include crushed rock, concrete reinforcing bars and sawn wood.  While initially these price rises were being absorbed in the tender process, more lately tender prices have crept up. 

Jonathan Mansell, regional head of building at GVA’s Cardiff office said: “This ongoing increase in material prices, with particular regard to steelwork, has seen contractors struggle to hold tender prices at lower levels.  The cost of this is being passed directly onto developers and funders and is placing an increasing burden on development margins. 

“Coupled with the increasing demands on building design performance through legislation such as the Building Regulations, this is further squeezing the opportunity for development to take place”.

Conversely, labour cost inflation has remained low, at 1% per annum through to the middle of 2011.  The majority of wage agreements have remained well below inflation or frozen and there is no shortage of skilled labour.  Wage increases are expected to be muted over the next two years, with workloads still considerably below pre-recession levels.

In summary, Jonathan notes, “The construction market remains weak despite recent reports indicating an increase in tender prices.  Labour costs for contractors have generally remained static or have seen increases in line with inflation, though material prices continue to accelerate due to the volatility in raw materials.  This has resulted in tender prices being put under real pressure by the increase in input costs.  Contractors as a result are generally reluctant to fix these costs and are bidding at cost or below in order to win work in a competitive market place.  This is likely to increase the post-contract activity of contractors in order to re-coup their costs through gaps in contract documentation.  The onus is on construction consultants to ensure that all documentation is as accurate as possible”.