Construction activity remains at a high level across the country and output in the fourth quarter of 2003 was higher than the previous quarter in all regions of the UK except London, where activity fell by 10 per cent.
However, the industry is worried about the recent hikes in the price of reinforcement and structural steelwork, which will add 2 per cent to contractors' costs during the first half of this year. According to Experian Business Strategies (formerly Construction Forecasting and Research), growth in 2004 is expected to continue its seven-year continuous increase, with a rise of 3.2 per cent in 2004 followed by a further 2.6 per cent in 2005 and 3.3 per cent in 2006.
The increases in contractors' costs, plus a steady rise in workload, are forecast to drive up building tender price rises nationally by 4.8 per cent in the year to the second quarter of 2005, while in London tenders are forecast to rise by 6 per cent. In the year to the second quarter of 2006, tender prices are expected to rise by a further 3.4 per cent nationally and by 4.6 per cent in London.
Civil engineering prices are forecast to increase by almost 5 per cent in the next year, slowing to a further 3.2 per cent in the year to the second quarter of 2006, driven by a shortage of specialist skills and those increased steel prices.
Input costs Contractors' input costs in the UK rose by 9.5 per cent in the year to June 2004 and by 6.1 per cent in the past three months, according to the survey carried out by EC Harris.
Price rises were boosted by huge increases in steel prices; those for reinforcement rose nationally by 25 per cent in the three months to June 2004 and by 33 per cent in the year. Structural steel prices increased by 14 per cent in the year while labour rates are now on average 7.5 per cent higher across the country than a year ago.
Further cost increases are likely to result from tighter asbestos regulations and from higher oil prices.
The introduction of the EU Landfill Directive on 16 July places onerous new requirements on the disposal of hazardous waste, and is likely to result in a doubling of the cost of disposal of hazardous waste including contaminated soils.
Civil engineering Output of infrastructure projects fell by almost 11 per cent in 2003 and new orders for the first quarter of this year were significantly down, despite the usual annual rush to get contracts awarded before the end of the fiscal year. Underlying reasons for the shortfall of new orders are undoubtedly the hiatus of work associated with Network Rail's internal reorganisation and the fact that as we move into the final year of the AMP (Asset Management Programme), most water programme contracts are already placed.
Tender prices for civil engineering works are forecast to rise by almost 5 per cent in the year to the second quarter of 2005 and by a further 3.2 per cent in the following year. Notwithstanding the worry about steel, concern about labour availability has still not gone away and shortages of resources could push tender prices considerably higher.
Construction activity Construction output during 2003 was up by 4.5 per cent compared with 2002 and is part of a continuous seven-year expansion of the industry.
However, the detailed figures show a shift of emphasis to public sector nonhousing works and private residential.
Output in the private commercial sector dropped by almost 6 per cent last year and Experian is forecasting a further fall of 4 per cent in 2004, followed by no change during 2005 and a modest 3 per cent rise in 2006.
Everyone is now interested in health and education. Output in the public non-housing sector rose by 20 per cent during 2003 and the forecast is for further growth of 13 per cent this year and 6 per cent in 2005 and 2006. When analysed, government figures indicate increased spending in the next two to three years of £5 billion on health and £22-25 billion on education, while housing is set to increase by £15-20 billion.
However, despite the government's healthcare policy, there are doubts about the ability of the sector to resource and manage massive PFI ventures. As a result, the NHS Private Finance Unit is restricting the number of PFI developments on the market in any one year.
Output in the private residential sector in 2003 was up by 12.5 per cent on the previous year and the new orders figures for the first three months of 2004 are 9 per cent higher than last year. Certainly private residential is attracting a great deal more interest from developers than it has for many years, with many schemes, including conversion of offices to residential use, in for planning. However, there is some danger of too many people wanting to get into the market, which would drive rents down and make some schemes unsustainable.
Demand for contractors' services then, has been driven by a buoyant economy, low interest rates and government initiatives. Apart from commercial offices, output in all the key industry sectors is expected to increase substantially above the longterm trend over the next two years, leading to strain on already stretched resources.
Tender prices The increases in steel prices have added approximately 2 per cent to the costs of buildings, while labour and other increases have all substantially added to contractors' input costs.
Given the present situation in the market, it is almost certain that contractors will pass these costs on in the form of higher tender prices.
Increased workload and a general capacity shortage in the market is leading to contractors becoming more selective and looking for more bespoke contract arrangements through negotiation rather than the more traditional tender arrangements. They are also becoming more focused on securing repeat business from selected clients and are more interested in partnering/framework opportunities.
What is apparent is that with unit costs of construction rising, alternative procurement - which involves rationalisation and incentivisation of the supply chain - is improving productivity, eliminating waste and adding substantially to value.
The tender prices index for the second quarter of 2004 has been revised upwards to reflect the higher steel prices. Looking ahead, the active state of the market, higher costs for the disposal of hazardous waste, a limited supply of skilled labour and further increases in supply prices of key materials are forecast to lead to rises in tender prices nationally of 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.
In London, despite the fall-off in commercial offices activity, there are a substantial number of major schemes in other sectors in the pipeline to make good the loss; with workload levels high, the 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 in the following year.
Macro economic factors A booming market in China and a surge of growth in India are being blamed for the shortages of steel in the UK market.
Certainly events that take place outside the UK have a huge bearing on the UK economy, not least the revival of the US economy, which has grown at an average annualised rate of 5.6 per cent during the past nine months.
In the UK, the latest forecast produced by the panel of independent forecasters shows an expectation of growth of 3 per cent in 2004 and 2.7 per cent in 2005, with retail price inflation increasing to 3.2 per cent by the end of this year, falling to 2.8 per cent next year. Higher inflation rates have lead to the Bank of England increasing base rates by a quarter of a percentage point in both May and June; the base rate, which now stands at 4.5 per cent, is a full percentage point higher than November last year.
Paul Moore is head of the cost research department at EC Harris. Tel 020 7391 2586