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While the 2012 Olympics will undoubtedly impact on construction activity, with some knock-on effect within the leisure and hotel industry and associated sectors, the overall effect on workload is unlikely to be dramatic. Increased security considerations in the light of the London bombings, however, will inevitably lead to higher costs.

Construction workload slowed during the first quarter of 2005, falling by 2 per cent compared with the first quarter of 2004 and no change compared with the previous quarter. New orders, on the other hand, increased by 9 per cent on the same period of 2004. While the output figures are disappointing, the new orders figures must inevitably feed through into increased construction activity.

The bulk of the Olympic-related construction activity will kick in from 2007 onwards, with some £2 billion due to be spent on buildings and venues; in crude terms, this will add some 1.5-2 per cent per annum to workload in the South East region during the five years to 2012. However, Heathrow's Terminal 5, the West Coast Main Line, the Channel Tunnel Rail Link and Arsenal and Wembley stadiums are all nearing the end of construction.

In terms of prices, the expectation is that tender prices in London will be bumped up by around 1-1.5 per cent by the Olympics building programme from mid-2007 onwards. However, current forecasts that take into account the Olympics' decision show the rate of rise of construction activity slowing to just 1.3 per cent this year, 2.1 per cent in 2006 and 4 per cent in 2007.

All the signs are that tender prices will continue to rise faster than input costs. Therefore, in the UK as a whole, building tender prices will increase by 4.8 per cent in the year to the third quarter of 2006 and by a further 3.4 per cent the following year.

In London, tender prices will increase by 5.7 per cent during the next year and by 5.3 per cent in the year to the third quarter of 2007. Tender prices for infrastructure works are forecast to rise by 4.7 per cent in the year to the third quarter of 2006 and by a further 5.1 per cent the following year.

Contractors' costs rose marginally in the three months to September, although they remained 5 per cent higher than this time last year. Site labour rates are approximately 8 per cent more expensive than a year ago. Further increases in materials costs are anticipated, with continued high levels of demand in China sucking in materials from around the world, while the record prices being paid for oil can only fuel further increases in materials' costs.

Public non-housing activity is expected to rise by 5 per cent per annum for the next few years but the public sector now accounts for only about 60 per cent of construction expenditure on health and education. Output on health in the public sector in 2004 was 23 per cent higher than in the previous year, while private-sector spending on health increased by a massive 101 per cent in the same period. Output of private commercial offices in the first quarter of 2005 was 10 per cent higher than in the first quarter of 2004, while new orders figures for the second quarter of this year were 14 per cent up on 2004.

Private housing prices and sales will continue to disappoint during the next two years. Contractors continue to be choosy. Single-stage tenders and lump-sum bids are not popular as contractors are unwilling to take on all the risks associated with a large project procured in such a manner.

Contractors continue to have limited resources available to tender for PFI/PPP schemes, and the complexity of some health schemes has resulted in contractors pulling out. Indeed, it is rumoured that the government's PFI hospitals programme is now running three years behind schedule.

The UK economy is slowing and the Treasury forecasts growth of just 2.2 per cent this year and 2.3 per cent in 2006, substantially down on the 3 per cent growth on which the 2005 Budget was based. Although this could lead to some problems funding public-sector expenditure, PFI/PPP schemes mean that health and education spending should be secure.

Inflation will only be slightly above the Bank of England's targets this year and will fall next year as economic growth increases. One consequence could be that the fall in interest rates in July is unlikely to be followed by any further cuts. Indeed, it has been suggested that, with the economy performing OK, inflation under control and the global economy recovering, the next interest rate movement could be upward.

Paul Moore is head of the Cost Research Department at E C Harris, tel 020 7391 2586. Email: paul. moore@echarris. com

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