Despite high levels of activity, confidence in construction has suffered as the commercial-offices market has failed to show any real signs of recovery, and interest-rate hikes have caused the housing market to stall.
Nevertheless, construction workload remains at a high level across the country. Output in the second quarter of 2004 was 1 per cent up on the previous quarter and 4 per cent higher year-on-year. Total new orders in the three months to July increased by 12 per cent compared with the same period in 2003, but showed a fall of 6 per cent compared with the previous three months.
Growth in 2004 is expected to continue, with a rise of 3.4 per cent this year, followed by rises of 2.7 per cent in 2005 and 3 per cent in 2006. The public sector is expected to be the star performer in the next couple of years, with double-digit growth driving the workload increases.
Based on an expectation of a continued steady rise in workload, building tender prices are forecast to rise nationally by 3.6 per cent in the year to the third quarter of 2005, while in London tenders are forecast to rise by 4.6 per cent. During the following year, tender prices nationally are expected to rise by a further 3.2 per cent, with a 4.2 per cent increase in London. Tender price rises for infrastructure works are forecast to be 4 per cent in the next 12 months, with a further 4-6 per cent increase the following year.
Input costs Steel price increases slowed in the past three months and, as a result, contractors' input costs in the UK rose by just 1.8 per cent. The increase of 9.7 per cent in the year to September 2004 remains high, primarily because of the rises in the first six months. Overall, materials prices rose by 2.5 per cent during the past quarter and by 13 per cent since September 2003. Labour rates across the country are up by 0.8 per cent in the past quarter and 5.5 per cent since September 2003.
Although the worries about the supply and price of steelwork have subsided, rebar and structural steel prices both rose during the third quarter of the year - by 3 and 5 per cent respectively - and year-on-year increases were 38 per cent for rebar and 18 per cent for structural steelwork. Further increases in steel prices have been announced for this year and through into 2005, but whether they will 'stick' remains to be seen.
Cost increases are likely to result from the current record oil prices on the world market, while the EU Landfill Directive, which came into effect on 16 July, appears to have doubled the cost of disposal of hazardous waste.
Civil engineering The increase in orders in the infrastructure sector encountered in 2003 has largely slowed down during 2004, with output in the first six months of the year down 13 per cent compared to the first half of 2003 The levelling off in expenditure in the past year is largely due to an easing in water workload during the last years of the current AMP (Asset Management Programme) water plans.
Rail expenditure has levelled in the past 12 months because of Network Rail's internal reorganisation, which has suppressed workload figures, while roads spending too has been slower than expected.
Tender price rises for infrastructure works are forecast to rise by 4 per cent over the next 12 months with a further 4-6 per cent increase over the following year. However, there remains a distinct possibility that demand in the different sub-sectors will peak at the same time, which could lead to contractors competing for key resources.
Construction activity Construction output in the second quarter of 2004 was 1 per cent higher than the previous quarter and 4 per cent up on second quarter of 2003.
The detailed figures continue to show a shift of emphasis to public-sector non-housing and private residential work, although the private commercial sector has shown some recovery in the second quarter of the year.
Looking ahead, increases in construction output of 3.4 per cent in 2004, 2.7 per cent in 2005 and 3 per cent in 2006 are forecast. Cash pledged by the government for health and education has had an impact on construction workload, and the public non-housing sector is forecast to increase by 12 per cent this year, 10 per cent in 2005 and a further 5 per cent in 2006.
If there is a caveat about the commitment to spending on health, it is due to worries about the ability of the sector to resource and manage these massive PPP/PFI ventures. Other siren voices have expressed doubts about the ability of the industry to deliver because of shortages of skilled labour in key trades.
Social housing should benefit from government involvement in what appears to be a real contribution to significant increases in funding for public housing, although structural changes in the management of social housing could affect the workload.
The private housing sector has seen boom times in the past few years, although the recent series of interestrate rises has caused a slowdown in house prices. It is forecast that the 12 per cent increase in output last year will be followed by a 7 per cent rise in 2004, before the inevitable slowdown, and no change in 2005, then a 1 per cent increase in 2006 .
Tender prices Demand for contractors' services has been driven by government initiatives and a buoyant economy and, despite interest rate rises, most major contractors around the country have healthy order books, generally underpinned by a number of large capital projects Although the London market has suffered more than most, there is no lack of work across the rest of the country and on some schemes it has been necessary to adopt alternative procurement strategies in order to secure tenders. Where there have been problems over labour and materials supplies, contractors have been looking to pass the risk of increases on to their clients, or refusing to tender.
Overall, given the level of workload, it should not come as a surprise that tenders are not as keenly priced as previously, and with contractors looking for more bespoke contract arrangements, clients are having to be more receptive and flexible in their approach to engaging a contractor.
The tender price index for the second quarter of 2004 was boosted by the higher steel prices; looking ahead, the higher level of spending in the public sector, together with a limited supply of skilled labour and further increases in key materials prices, is forecast to lead to rises in tender prices nationally of 3.6 per cent over the year to third quarter 2005, with a further increase of 3.2 per cent the following year. In London, there are still a large number of major schemes in the pipeline that should result in prices in London rising by 4.6 per cent in the year to third quarter 2005 and by a further 4.2 per cent the following year.
Macroeconomic factors Higher interest rates have at last hit the housing market. Mortgage lending fell in August and approvals were at their lowest since November 2000; house prices fell in August but rose by 19.2 per cent for the year.
Worldwide, growth has remained extremely healthy with most major economies seeing faster growth than was forecast; the IMF (International Monetary Fund) expects that growth in the advanced economies of the world will be 3.6 per cent in 2004, slowing to 2.9 per cent in 2005.
As ever, the US economy affects the rest of the world. Economic growth in the US in the second quarter of 2004 was an annualised rate of 3.3 per cent.
Despite record oil prices and a slip in consumer confidence in August, most pundits are forecasting persistent strength across the US economy;
American consumers are expected to keep spending at a high enough rate to ensure a smooth landing, when the