Notwithstanding the nervousness of the past six months, workloads in the construction industry look to be holding up. Contractors remain busy, although there are some early signs of an easing in private sector commissions.
With the government hinting at increased taxation to pay for improvements in the health service, the commitment to higher capital spending on both health and education looks assured. And, despite the Railtrack debacle, construction workloads are likely to be buoyed by increased investment in infrastructure.
The introduction of the Aggregates Tax on 1 April will effectively add one per cent to building tender prices. Apart from this one-off increase, construction tender prices are forecast to rise over the next two or three years at a rate just ahead of the underlying rate of retail price inflation.
After a slow rise during the first half of 2002, tender prices nationally (including Aggregates Tax) are expected to increase by 3.7 per cent in the year to the first quarter of 2003 and by a further 3 per cent the following year. In London, higher input costs and higher levels of construction activity are forecast to lead to a rise of 5.3 per cent over the next year and a further 4.1 per cent over the following 12 months.
Contractors' input costs throughout the UK rose by 4 per cent in the year to December 2001, with labour rates up by 8 per cent and materials costs up by 1.2 per cent. During the past three months, input costs throughout the UK rose, on average, by 0.9 per cent, with labour rates up by 0.8 per cent and materials up by 0.3 per cent.
Labour and material costs throughout the UK reflect both the higher basic costs in some regions and the ebb and flow of workload across the country. Despite the slowdown in the South East, which led to overall cost increases in London of just 2.7 per cent during the past year, London remains the most expensive place to build, with costs 12 per cent above the national average. Scotland and Wales remain the cheapest regions, with costs 8.3 per cent and 7.3 per cent respectively below the average.
London remains most susceptible to swings in workload, and while labour rates nationally increased by 8 per cent, in London they struggled to show a 4.5 per cent rise. In contrast, rates for skilled labour in Wales increased by 20 per cent in the past year - 5 per cent during the past quarter - while in the South West, daily rates rose by 15 per cent.
Changes to Part L of the Building Regulations will inevitably result in increased insulation to walls, floors and roofs; means of mitigating solar heating (including the use of shading); and a greater use of controls to M&E installations, including timing controls and boiler controls.
The costs of complying with the new regulations have been variously calculated at adding 2-5 per cent to the building cost, although some higher figures have been quoted depending on the particulars of each scheme. On the positive side, buildings should be cheaper to run.
The construction industry appears to have survived the turn of the year without going into recession. Orders rose by 2 per cent in 2001, despite a fall of 2 per cent during the fourth quarter.
Total output in 2001 was £60.2 billion, 3.7 per cent higher than in the previous year, and the sixth consecutive year that a positive figure has been recorded. What's more, it exceeded the record breaking output figure of 1990. According to the Joint Forecasting Committee (JFC), by 2003, infrastructure work will be 29 per cent higher than in 2000.
In the short term, the placing of Railtrack into administration - which caused a huge drop off in orders in the fourth quarter of 2001 - is likely to cause continued problems. However, of the £35 billion Railtrack has earmarked for investment, £30 billion is already committed, and provided that contracts are honoured, output will continue to rise in line with previous forecasts. Roads too, will see more cash, partly through PFI/PPP schemes, while the go-ahead for Heathrow Terminal 5 will see a £2.5 billion boost to construction spending over the next five years.
The manufacturing industry in the UK continues to suffer, despite the historically low interest rates, and little respite is likely in the short term.
The private commercial sector, which in 2001 provided 17.5 per cent of total construction spending, is forecast to slow during the next couple of years, with retail and entertainment schemes affected by relatively low levels of consumer confidence. The continued shake-up in the banking and investment sector, meanwhile, is slowing demand for offices. Output on new private housing fell by 6 per cent during 2001, and a continued fall-off is anticipated.
With the prospects of higher mortgage rates, the Halifax is forecasting a rise in house prices of 5 per cent this year. Repair and maintenance in the housing sector is expected to show at least two years' strong growth. Part of this will come from repairs to housing estates that have recently been transferred from local authority control to the private sector; part comes from house owners taking advantage of current low interest rates.
There are continued worries within the industry about shortages of skilled labour, which can translate into a short supply of specific local skills and a consequent hike in subcontractors' rates. Given the small number of people entering training schemes, this is likely to remain a long-term problem for the industry.
The likely consequence is the continuance of pricing 'hot spots', as local demand outstrips the supply of suitable skilled labour.
PFI procurement remains the preferred option for hospital and education construction projects. After a long gestation period, the PFI/PPP programme for hospitals is now falling into place, with some £31 billion committed to 29 hospital schemes.
A recent meeting of the G10 central bankers suggested the global economy had already started to emerge from recession.
The key US growth figure for the fourth quarter of 2001 was revised substantially upwards, from an initial figure of 0.2 per cent, to show a 1.4 per cent rise. Growth of 2-3 per cent is now forecast in the US for the first quarter of 2002.
In Europe, the euro is likely to have had a mild inflationary effect as prices get rounded up, before the ease of comparing prices around Europe sees a return to more normal competitive pricing. The latest figures from Europe show that Germany's GDP fell by an annual equivalent figure of 1 per cent in the fourth quarter of 2001, its third consecutive quarter of decline.
However, other indicators suggest that the euro economies are starting to perk up. Industrial production in the euro zone rose by 0.8 per cent in December, the first rise since last August, although output was still 4.1 per cent lower than a year ago.
Ironically, UK figures showed a slowdown in the fourth quarter of 2001, although the consensus view is that the UK economy will expand by 1.9 per cent this year and by a further 2.6 per cent during 2003. While the figure for 2002 is below the level needed for economic health, the latest figures published by the Treasury show projected growth for the next three years is running at between 22.3 per cent.
Economic pundits are forecasting continued healthy growth in the UK economy, while the established forecasts of construction activity also reflect positive growth figures over the next three years.
Although there is little agreement about the scale and pace of growth, there is broad agreement that the profile of the industry will change in the next two years, as infrastructure and public sector work increases and the private sector rises only slowly, or, in the case of the industrial sector, continues its decline.
Paul Moore is an associate and head of the Cost Research Department at EC Harris
Output to increase by 2.3 per cent this year and by 2.4 per cent in 2003.
New orders for 2001 up by 2 per cent on the previous year, despite a fourth-quarter slowdown.
Skilled labour rates up by 8 per cent nationally in the 12 months to December 2001.
Materials prices up by 1.2 per cent over the year.
Commercial and industrial sectors facing a slowdown.
Aggregates Tax adds 1 per cent to building tender prices and 1.5 per cent to civil engineering tenders.
Tender prices to rise nationally by 3.7 per cent in 2002 (including Aggregates Tax), and by 3 per cent over the year to the first quarter of 2004.
Tender prices in London to rise by 5.3 per cent over the next year (including Aggregates Tax),4.1 per cent over the following year.
Civils tender prices to rise by 6.5 per cent over the next year (including Aggregates Tax), with a further 4.2 per cent over the year to the first quarter of 2004.
Changes to Part L will increase building prices by 2-5 per cent from 1 April 2002, although higher figures have been quoted.
Underlying rate of retail price inflation expected at 2-2.3 per cent over the next four years.
Economic growth in the UK to rise by 1.9 per cent in 2002, and by 2.6 per cent in 2003.