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Construction futures

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technical & practice - The implications of the market and government policy on tender prices are forecastable, but what about the Olympics?

The construction output of £80.7 billion in 2004 was a record high, and orders continued to increase to the end of the year. Figures during the fourth quarter of 2004 were up 4 per cent compared with the previous quarter, and 11 per cent compared with the same quarter of 2003. As a result, contractors are being much more selective about the schemes for which they want to tender.

Forecasts from January 2005 indicate that output is expected to rise by 2.1 per cent in 2005, 1.7 per cent in 2006 and a further 2.9 per cent in 2007. Social housing is expected to perform well over the next couple of years, while some resurgence of activity in the commercial sector is also forecast.

With a steady rise in workload, building tender prices are set to rise nationally by 3.5 per cent in the year to the first quarter of 2006, while in London tenders are forecast to increase by 4.5 per cent. Over the year to the first quarter of 2007 tender prices nationally are expected to rise by a further 3 per cent, with a 4.2 per cent increase in London.

Reinforcement prices hardly moved and structural steel prices actually fell marginally during the first quarter of 2005. As a result, contractors' input costs in the UK rose by 'only' 2.7 per cent over the quarter and by 15 per cent over the year to March 2005.

Materials price rises of 0.8 per cent over the past three months remained modest, although labour rates increased by 4.8 per cent over the quarter and 13 per cent over the year from March 2004. The national average daily rate for bricklayers is now over £156 per day, with carpenters on almost £159, although contractors in some regions - and not just in London - are now paying more than £200 a day to attract skilled labour to their sites.

The overriding cause of the increase in materials prices during the year was the huge hike in the price of reinforcement, up almost 35 per cent since March 2004, and structural steel, which rose by 25 per cent over the same period. The 'crisis' for these materials seems to have passed and, although further increases in list prices are timetabled for this year, any rises are likely to be at a fraction of those of last year.

The new record high in construction activity in 2004 came as the public non-housing sector continued to outperform all other sectors, with an increase of 19 per cent over the previous year. However, following three years of average 20 per cent growth, this sector is forecast to slow down over the next couple of years. Despite the political commitment, the level of spending on health and education over the past few years is considered to be unsustainable and concerns have been expressed that there are insufficient construction firms able to manage and resource the number of multi-million pound private finance initiative health schemes coming to the market. Output in the public non-housing sector is set to increase by 7 per cent this year, but will slow thereafter to show rises of 2 per cent in 2006 and 2007.

The private housing sector too is expected to slow, with no change this year and a fall of 2 per cent in 2006, before a pick-up of 3 per cent in 2007. Figures from Halifax show that house prices in the year to February 2005 increased by 12.1 per cent - the lowest annual rise since December 2001. In contrast to the private sector, and with the ODPM behind it, social housing is expected to show strong rises in output - 9 per cent this year, 7 per cent in 2006 and 10 per cent in 2007.

With labour still in short supply and contractors worried about taking on additional risk with materials prices, it is no surprise that tender prices have continued to outstrip retail-price inflation. However, there is a fine balance between contractors still hungry in the marketplace and those with substantial order books.

The rationalisation of the industry over the past few years has resulted in relatively few contracting organisations able to build some of the extra large schemes.

In London, although the relative buoyancy of the private residential market has balanced the decline of commercial offices, the switch has not been straightforward. Multistorey residential schemes are more complicated to build than repetitive office schemes of the same size, with problems over finance, phasing and considerably longer contract periods.

Given the mixed market, there is evidence that contractors in some regions are selecting projects that they particularly want to win and declining to bid on others, with an inevitable effect on prices.

Contractors looking for the best deals are focusing on repeat business where levels of profitability have already been established. In addition, those contractors who have secured their supply chains through established working relationships with trade contractors are becoming more secure in their bids. With contractors trying to reduce their risks, singlestage design and build schemes are attracting cost premiums - if they are being tendered at all.

Some of the contractors' caution may be down to capacity problems.

The industry has increased its output by 18 per cent in real terms over the past five years and most contractors are experiencing real problems in recruiting and keeping skilled labour.

The increase in skilled labour rates of 53 per cent in the past five years compares with an increase in retail prices of 13 per cent over the same period, and is a realistic comment on the recruitment problems the industry needs to address.

Although the decision on the Olympics is only three months away, no allowance has been made in the forecasts for London winning the bid. Should this come about, the investment of £2.4 billion in 2007-10 would, in effect, add 8 per cent per annum to the construction workload in the London region. For some sectors, serious shortages of resources are likely to result, leading to substantial price hikes across the region.

The latest official figures confirm that the UK economy grew by 0.7 per cent between the third and fourth quarters of 2004, slightly ahead of the economy's long-term average quarterly growth rate, although consumer spending growth eased to 0.4 per cent in the fourth quarter of 2004, the smallest rise since the first quarter of 2003.

The round-up of forecasts prepared by the Treasury indicates that the money markets think growth will continue at 2.5 per cent during 2005, easing to 2.4 per cent next year. At the same time, retail price inflation is forecast to run at 2.5 per cent for each of the next two years.

The movement of the US economy affects world economies, so the 3.9 per cent growth of America's GDP in the year to the fourth quarter of 2004 is of great interest. The expectation is that the Federal Reserve's key interest rate, which has been raised six times since last June, will end the year substantially higher than the current 2.5 per cent rate, with guesses ranging from 3.5 per cent to 5 per cent.

Paul Moore is head of the cost research department at EC Harris. Telephone:

020 7391 2586

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