Although construction output continued to rise during the first nine months of 2003, the future looks less certain; construction new orders figures fell considerably, and in the third quarter figures were down 17 per cent on the same period in 2002.
The current expectation is that workload will continue to rise slowly and, as result, building tender price rises will increase by 3.8 per cent in the year to the fourth quarter of 2004 and a further 3.5 per cent in the following year. Although major new office schemes in London have fallen off the map, the non-office megaschemes will keep contractors busy, and as a result tender prices in the capital are expected to rise by 4.1 per cent in the next year with a further increase of 3.9 per cent in the year to the fourth quarter of 2005.
With rail, water and road work all increasing in value, and a shortage of some specialist skills to service that demand, civil engineering tender prices are expected to rise by 5.2 per cent over the next year, with a further 4 per cent rise forecast to the fourth quarter of 2005; for some specialisms within infrastructure, that figure could be well short of the mark.
Input costs Although contractors' input costs rose by 4.4 per cent in the past year, they have stagnated during the past three months. Labour rates increased on average by 6.5 per cent while materials' prices were 2.7 per cent higher in the year from December 2002.
Skilled labour rates actually fell by 0.2 per cent across the country during the past three months, with many regions showing negative figures and the South West showing the largest fall, of 4.5 per cent. In contrast, labour rates in Wales increased by 5.2 per cent and in London by 4 per cent.
Materials prices have hardly moved over the quarter although, looking ahead, steel prices can be expected to show some substantial increases now that the US is about to lift the tariffs on imported steel.With a larger market now available, steel manufacturers can be expected to be looking for higher profits.
Civil engineering Infrastructure spending is likely to help prop up construction activity during the next couple of years and orders in 2003 were up by 10 per cent on the 2002 level. The increase was dominated by water, roads and rail, where 20-30 per cent increases were experienced; some of the subsectors are on course to boost their spending hugely during the next two years.
The latter years of the current fiveyear asset management plan (AMP) for water have historically been backend loaded; and the rail sector is expected to have renewed energy in 12 to 18 months. Current high levels of demand have already resulted in a number of companies turning down tender opportunities.
Tender price rises for infrastructure works are forecast to rise by 5.2 per cent during the next 12 months, with a further 4 per cent increase the following year. However, if the peaks of the different subsectors coincide, significant rises including the possibility of double-digit inflation could result.
Construction activity Construction output in the third quarter of 2003 was 6 per cent higher than the previous quarter and 2 per cent up on the second quarter of 2002.
Based on figures for the first nine months of the year, output figures for 2003 are almost certain to top the record output of 2002.
However, there has been a feeling for some time that the construction industry has been living on borrowed time, and that the published output figures have given a rosier glow than the experience 'on the ground'.
The detailed workload figures show the switch in activity, and just how buoyant public sector capital spending has become. In the first nine months of 2003, new orders for public-sector schools rose by 37 per cent, for universities by 16 per cent, and for private schools by 9 per cent, when compared with the equivalent period of 2002. New orders for public health rose by 2 per cent and for private health care provision by 16 per cent over the same period. In contrast, new orders for private offices were 25 per cent lower than the first nine months of last year.
The latest forecast prepared by Construction Forecasting and Research (CFR) indicates that construction workload will increase by 3.3 per cent in 2004 and by a further 3.2 per cent in 2005.
However, an increasing percentage of that growth is in infrastructure and public sector non-housing - especially health and education - and there remains the suspicion, despite the government's apparent commitment to the nation's health and education, that a downturn in the economy will lead the chancellor to pull the plug on funds with a dramatic effect on workload.
Increased construction activity in the North West has made it the new 'hot' area. Although the rebuilding of Manchester's city centre is now substantially complete, there are further schemes under way, including the new 47-storey Beetham Tower.
In Liverpool, the City of Culture designation has already had an impact on the perception of the city, large parts of which are due for redevelopment. One result of all this activity is that labour rate increases in the North West are the highest in the UK with daily rates for skilled labour some 15 per cent higher than a year ago.
Tender prices Building tender price rises have slowed. Activity in the South East is holding up, despite the shortage of new orders for offices, and in London, the forecast is for a rise in tender prices of 4.1 per cent over the coming year with a further 3.9 per cent over the year to the fourth quarter of 2005.
Contractors are still busy and shortages of skilled labour continue to cause problems; in a busy market, this can lead to contractors picking and choosing the jobs on which they want to bid.
On 'difficult' jobs, tenders are likely to carry a substantial mark-up. Subcontractors in a number of specialisms, particularly mechanical and electrical engineering service, are remaining selective and increasing their prices to reflect the extra demand.
As noted above, the North West is in boom conditions, and the region is expected to show a higher rate of inflation than London with year-onyear increases over the next two years of 5.5 per cent and 5 per cent.
Looking ahead, a successful London Olympic bid would generate a huge construction workload. Even if the bid is unsuccessful, the existence of the masterplan is likely to see some of the schemes go ahead.
Macro economic factors So the chancellor was right all along, inflation will continue to meet targets, interest rates will stay low and growth will be healthy, according to the autumn statement. The latest Treasury forecast, for growth of 3-3.5 per cent in 2004 and 2005, contrasts with the view of the City, which is projecting 2.6 per cent growth in 2004 and 2.7 per cent the following year.
And yet the chancellor appears still to be lucky. The biggest driver of the world economy, the US, is recovering, aided by a drop in the value of the dollar, down 30 per cent against the euro in the past year. The annualised growth rate for GDP in the third quarter of 2003 of 8.2 per cent means that the US economy grew by 3.5 per cent in the year.
Looking further ahead, the chancellor's autumn statement announced the possibility of setting up trusts that would offer big tax breaks for investment in real estate companies. These Real Estate Investment Funds (Reits) would apply to commercial and residential property and could double the market capitalisation of the UK listed property sector during the next 10 years.
Paul Moore is an associate and head of cost research at EC Harris. Email paul. moore@echarris. com
Construction output in the third quarter of 2003 was 2 per cent higher than the previous quarter and 6 per cent higher than the third quarter of 2002.
Construction output is forecast to increase by 3.3 per cent this year and by 3.2 per cent in 2005.
Skilled labour costs rose by 0.2 per cent during the past three months and by 6.5 per cent in the past year.
Materials prices rose by 2.7 per cent in the year from December 2002 but there was no change during the past quarter.
New orders for public sector schools rose by 37 per cent and private sector schools by 9 per cent in the first nine months of 2003, compared with 2002.
New orders for private health care provision were up by 16 per cent in the same period.
New orders for private offices were 25 per cent lower than the first nine months of last year.
Commercial and industrial sectors are facing a slowdown. Infrastructure output was forecast to fall by 5 per cent in 2003, then rise by 5 per cent this year and by 7 per cent in 2005.
Investment in health and education to boost public non-housing sector output by a further 16 per cent this year and by 8 per cent in 2005.
Tender prices are forecast to rise nationally by 3.8 per cent this year and by 3.5 per cent in 2005.
Tender prices in London are set to rise by 4.1 per cent this year and by 3.9 per cent in in 2005.
Civils tender prices to rise by 5.2 per cent this year, with a further 4 per cent rise in 2005.
The underlying rate of retail price inflation was expected to run at 2.7 per cent in 2003, 2.4 per cent this year and thereafter to average 2.5 per cent to the end of 2007.
Economic growth in the UK was set to rise by 1.9 per cent in 2003, 2.6 per cent this year and 2.5 per cent in 2005.