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News Release from: Chartered Institute of Building [CIOB] | Subject: Construction Demand Continues At Record Levels
Edited by the Buildingtalk Editorial
Team on 28 September 2004
Construction Demand Continues At Record
Levels
Construction outlook 'warm and sunny' but big increase ahead in tender prices and increasing pressure on resources.
At current price levels, the United Kingdom construction industry is expected this year to generate output to the value of around £100 billion This estimate was given to CIOB International News by Construction Forecasting and Research based in London in response to questions about the growth of the industry's workload since the baseline for cost comparisons was reset in the year 2000
This article was originally published on Buildingtalk on 12 Mar 2004 at 8.00am (UK)
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At that time the value of the industry's annual output, including repairs and maintenance as well as house-building and all other forms of building and civil engineering work, was running at around £70 billion.
This year the comparable figure, in terms of price levels ruling in 2000, will be of the order of £80 billion, indicating growth of more than 10 per cent over four years.
Moreover, within the next two years the volume of work at constant prices is forecast to rise to £85 billion.
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In current terms, prices are rising in step with rising volume.
A comparison between construction output and the national tender price index in the EC Harris recent Economics Survey shows that whereas in 2000 the index was standing at just below 140, by 2006 tender prices will have risen about 45 points.
That's more than 12 per cent inflation over six years, compared with about the same rate over the previous 12 years (120 in 1988 to 140 approx.
in 2000).
In his commentary on these indicators, Paul Moore, head of cost research at EC Harris, recites some of the factors behind the current lift in tender prices.
"Contractors have been badly hit" he said, "by the hikes in steel prices.
In addition substantially higher costs for the disposal of hazardous waste and tighter asbestos regulations will all add substantially to contractors' input costs.
The above increases in steel prices have added approximately 2 per cent to the costs of buildings and approximately 1.5 per cent to civil engineering schemes.
Big increase ahead in tender prices.
"Given the present situation in the market, contractors will almost certainly pass these on in the form of higher tender prices.
With fuel prices on the rise and steel expected to be 50 per cent more expensive by the end of the year than it was in January, further direct increases in tender prices can be expected due to this one product." Looking ahead, said Mr Moore, given the active state of the market, a limited supply of skilled labour and further increases in supply prices of key materials, tender prices nationally are likely to rise by 4.8 per cent over the next year, with a further increase of 3.4 per cent in the year to the second quarter of 2006.
This is the national forecast, but in London prices are expected to rise more steeply.
With workload levels high, the EC Harris forecast is that tender prices in London will rise by 6 per cent in the year to the second quarter of 2005, and by a further 4.6 per cent over the following year.
That's an astonishing rise of more than 10 per cent over the next two years, at a rate of inflation equivalent to that of the previous four years.
An industry under pressure to take on rising volumes of work in almost every key sector of the economy should have little difficulty in recouping the increases.
Indeed, profitability may well improve with rationalisation of supply chains going on in housing, hospitals and now schools construction and refurbishment.
But it must mean that the client - that is the public sector such as the NHS and the local education authorities - will be getting less for their currently approved budgets.
Construction outlook 'warm and sunny'.
The more recent commentary by Davis Langdon in its own tender price forecast it that with the office market showing signs of recovery and demand at an all-time high, the outlook for construction is 'warm and sunny'.
This cost consultancy finds the United Kingdom economy growing at its fastest rate for at least four years, with growth in the second quarter of this year at 0.9 per cent higher than in the first.
This report confirms that in these buoyant market conditions the industry has been faced with underlying cost inflation greater than for a number of years.
As a result, it says, construction price inflation in many regions has been more than double that of general inflation over the past year.
That was not so in London where tender prices increased at a lower rate than the retail prices index: that easement as the foregoing commentary suggested will be lost next year, and indeed construction cost inflation in the Greater London region will be greater than elsewhere in country.
Much of the increased spending on construction, for example about half the £5 billion Building Schools for the Future programme, will be funded through private finance initiatives.
Such part of the funding that can be shifted to the private sector reduces the risk for the client authorities, and at the same tends to improve efficiency in both design and construction.
But although procurement through PFI may improve the timing of delivery after the contract is signed, Davis Langdon points out that "the slowness of PFI procurement has been well documented and faster processes will have to be introduced to speed up delivery as promised." Local education authorities all over England will be embarking on a voyage of discovery in this respect when the BSF £2.2 billion PFI funding element begins to unfold.
Increasing pressure on resources.
On the immediate outlook, the Davis Langdon forecast comments on the prospect that construction output will continue to grow this year and next.
"But pressure on resources will continue to plague the industry.
All the key construction procuring government departments have expressed fears over the industry's ability to deliver big increases in spending programmes.
"Earlier in the summer, the Department of Health was reported to have decided to limit the number of hospitals that it was trying to take to the market at the same time.
The ability to be able to deliver Crossrail in a timely and economic manner has been questioned and the Office for Government Commerce is undertaking a review of the industry's capacity to deliver the enhanced spending programme, particularly at a time when the private sector begins to recover.
"As well as market pressures exerted by supply and demand, contractors are also faced with substantial underlying cost increases.
Construction wage awards already agreed for the year ahead range from 4.5 per cent for heating and ventilating operatives in October 2004 to 9.5 per cent for building operatives in June 2005.
The use of imported labour has helped to peg the growth of site wages over the past two years as construction demand is at record levels." Davis Langdon's datafile chart for construction costs shows that whereas in the year 2000 the building cost index was running at about 500 points compared with the base of 100 in 1976, the forecast for 2005 is in excess of 600.
That's a rise of some 20 per cent in five years, and the increases are set to move on to the 650 level in 2006.
This is only to be expected in a world where employment costs are rising by 10 per cent, material prices at a similar rate and the price of some key components can soar by 50 per cent in a single year.
The rising cost of financing the business also has to be recouped.
But since in the present expansionary climate most of the increases can be passed on, the inflationary conditions at present do not constitute a threat to the economic health of the industry.
That may show itself later on when the politicians discover in post-election assessments that the current volume of financial commitments to construction is unsustainable.
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