Despite a degree of resilience, general nervousness in the money markets has been reflected, in part, in construction workload. Although new orders for the first quarter of 2002 were 18 per cent higher than the previous quarter, these figures were boosted by a 115 per cent increase in substantial orders for roads and water infrastructure.
Workload outlook Most industry forecasters expect workload to continue to rise, with increases of 2.8 per cent in 2002 and a further rise of 2.5 per cent in 2003; the main drivers for growth will be the repair and maintenance sector and continued spending on infrastructure.
Tender prices for construction work are expected to reflect this continued rise in activity levels, although some contractors are nervous about longer-term workload. As a result, tender prices are forecast to rise by 2.8 per cent in the year to the second quarter of 2003 with a further three per cent increase in the following year. In London, it is forecast that tender prices will rise by 4.3 per cent next year and then by 3.8 per cent in the year to the second quarter of 2004.
Input costs Contractors' input costs throughout the UK rose by 2.9 per cent in the year to March 2002, with labour rates up by seven per cent and materials costs 0.5 per cent higher, but with little movement in the past three months.
Variations in workload continue to lead to regional differences in the movement of costs. The largest increase in costs in the past year was in the North West region, up by 8.1 per cent over the year, mainly due to a 12.6 per cent hike in labour rates and a rise of 5.3 per cent in materials prices.
At the other end of the scale, costs barely moved in the South West, with labour rates up by five per cent, but a fall of three per cent in materials prices.
London remains the most expensive region, 14 per cent above the national average, driven primarily by rates for skilled craftsmen, with some bricklayers now able to command up to £146 a day.
Continued high levels of workload in the South East are expected to see labour rates in the region continue to rise.Contractors on Heathrow's Terminal 5 have started a recruitment drive which is likely to put pressure on other schemes in the region. National Insurance contributions will probably add 0.5 per cent to construction costs across the board from April 2003.
The US government's decision to impose steel embargoes in March this year has added to the problems of the oversupply of steel around the world and prices are likely to reflect this situation in the future. Prices for reinforcement and structural steelwork both fell in the past year and are now seven per cent and three per cent cheaper, respectively.
Civil engineering Road building boosted new orders for infrastructure in the first quarter of 2002, 14 per cent up on the corresponding period for 2001; there is also clear evidence of increased activity in the water sector, with orders in the first quarter up by 57 per cent.
Construction activity Against the general slowdown in the UK economy, activity in the construction industry appears to be holding up, although the private industrial and private commercial sectors have been hit by substantial falls in new orders. With confidence in British industry at a low ebb, it is no surprise that the erosion in new orders in the private industrial sector continued, with a fall of 27 per cent during the first quarter of the year, compared with 2001. New orders for offices fell substantially in the first quarter and only a rise in private education and the entertainment sectors saved the private commercial sector from falling more than 13 per cent during the same period.
Construction output during 2001 rose by four per cent compared with 2000 with the infrastructure sector leading the way with an increase of nine per cent year on year. Private commercial (up four per cent) and private repairs and maintenance (up 12 per cent) also showed strongly.
In the March Budget, chancellor Gordon Brown reiterated his plans for improvements to public services which should see further high levels of capital spending on health and education. Orders for health building during 2001 were already some 25 per cent higher than the average of the previous two years, while education new orders, on the same basis, rose by 130 per cent. There remains continued concern within the industry whether the various government departments will be able to deliver on these investment plans.
Looking ahead, no growth is expected in the commercial offices sector during this year, primarily due to an easing in demand from tenants, and a fall of two per cent is forecast for 2003.
Tender prices The continued rise of building tender prices was slowed by the reaction to world events in the fourth quarter of 2001 and there has been further retrenchment during the first quarter of this year. However, notwithstanding the slowdown during the first quarter, contractors generally appear optimistic.
As ever, there is no single view on what is happening within the industry and it would be a mistake to view it as a monolithic entity. The state of order books very much dictates the views of contractors of their own market; in some parts of the country, contractors are keen to secure work, while in other 'hot spots', tender invitations are being turned down due to commitments elsewhere.
Tenders for larger schemes seem to be more consistent; on the largest schemes, package procurement and partnering arrangements result in risk being shared and lower pricing levels generally. Contractors tendering for smaller jobs are a little more worried about the future and competitive prices are being found on some of these schemes.
There is a possibility that the shortfall in the skilled workforce could be affecting the construction industry's ability to respond to increased demand. Certainly there are reports of shortages of specialist sub-contractors capable of taking on complicated schemes and on more complex and less desirable schemes, prices are likely to be affected.
Activity within London and the South East remains at a higher level than the rest of the country.However, even within London, there is no universal view on tenders; large, straightforward, new-build schemes continue to attract keen bids, particularly where contractors are looking to establish or further develop their relationships with 'blue chip' clients.
Keen prices are being received for office fit-outs in the capital as demand seems to have slowed and the specialist contractors in this market have become more competitive.
Steady house price rises, particularly in the South East, have done a lot to fuel housing demand, although, once again, there are suggestions that the market has peaked. Notwithstanding forecasts of rises in interest rates later this summer, the highquality private residential sector in London is still very bullish and for some developers, selling 'off plan' has become the key to getting the scheme on the go.
Macro economic factors In the immediate aftermath of the 11 September terrorist attacks, and the subsequent nervousness in the markets, it looked as if the UK economy had escaped relatively unscathed, although the latest figures on growth show the UK economy has only just missed going into recession in the past two quarters.
The UK economy is still confidently expected to recover during 2002 and a roundup of views of independent analysts predicts a growth of 1.9 per cent, accelerating to 2.8 per cent in 2003.
Underlying rates of inflation are also expected to remain within the government targets, while interest rates are perceived as being unlikely to change before August.
The latest house price figures are being treated with caution. The Halifax figures show the annual rate of house price inflation was 15 per cent in the year to April, with prices forecast to ease to seven per cent by the end of the year. The Nationwide figures show a rise of almost 18 per cent over the past year with a four to five per cent increase forecast.
Away from the UK, the recovery of the American economy continues apace; US retail sales rose substantially in April although the spending spree was accompanied by inflation. Closer to home, 2001 was a dismal year for continental Europe with recessionary trends in Germany and stalled growth in other Euro-economies. For 2002, the most that is hoped for is a return to positive figures.
Paul Moore is an associate and head of the Cost Research Department at EC Harris
CONSTRUCTION FUTURES SURVEY: AT A GLANCE
Construction output forecast to increase by 2.8 per cent this year and by 2.5 per cent in 2003.
Construction new orders for the first quarter of 2002 were 18 per cent higher than the previous quarter, mainly due to infrastructure orders.
Skilled labour rates up by seven per cent nationally over the year to March 2002.
Materials prices rose by 0.5 per cent over the year.
Commercial and industrial sectors facing a slowdown.
Infrastructure and repair and maintenance to rise.
Tender prices forecast to rise nationally by 2.8 per cent in the next year and by three per cent in the year to the second quarter of 2004.
Tender prices in London to rise by 4.3 per cent in the next year and by 3.8 per cent the following year.
Civils tender prices to rise by almost five per cent in the next year with a further four per cent increase in the year to the second quarter of 2004.
Underlying rate of retail price inflation expected to run at 2.1-2.2 per cent for the next five years.
Economic growth in the UK to rise by 1.9 per cent in 2002 and 2.8 per cent in 2003.