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The longest period of growth in the construction industry since the 1960s came to an end in 2005, when output fell for the first time since 1994. The fall was only marginal, at 0.4 per cent, and was mainly because of a slowdown in the UK economy during the year.

Although the UK economy should pick up over the next couple of years, any threat to recovery will undoubtedly affect the commitment to continue spending on education and health.

The latest forecast prepared by Experian Business Strategies is unexpectedly buoyant, with output expected to increase by 1.7 per cent in 2006, 3.2 per cent in 2007 and 3.7 per cent in 2008. The main drivers for recovery are expected to be the two largest sectors: private commercial, which is expected to increase by 3 per cent in 2006 and by 6 per cent over each of the following two years; and private housing, with no change in 2006, but then increases of 2 per cent in 2007 and 4 per cent in 2008.

The potential for recovery in the housing sector is emphasised by the latest Halifax and Nationwide house-price figures, which show rises of 5.1 per cent and 4.4 per cent respectively over the past year. The recovery comes after the housing market was subdued for much of 2005.

Despite worries about the performance of the economy, Experian is forecasting a return to growth in the public sector.

The public housing sector is expected to show annual increases of 6 to 7 per cent through 2006?2008, while public non housing is forecast to show no change in 2006 but then rise by 2 per cent over each of the next two years.

INPUT COSTS Latest input-cost figures show that contractors' costs increased by 3.7 per cent in the past three months, although previous falls mean that prices are only 2.5 per cent higher than they were a year ago.

Reinforcement prices are still considerably lower than this time last year, down 9 per cent, while structural-steel prices, although still marginally lower than a year ago, have bounced back by 4 per cent over the last three months. Site labour rates are up by 3.8 per cent on average over the past year, and the £200-per-day craftsman has shown up for the first time in the survey. Looking ahead, price rises of materials have already been announced for 2006, although the state of the market is likely to decide whether these prices will 'stick'.

TENDER PRICE FORECAST With a modest recovery in construction activity expected over the next two years, tender prices are forecast to continue to rise faster than labour and materials costs and retail-price inflation.

The forecast is therefore that in the UK as a whole, building tender prices will increase by 4 per cent in the year to the first quarter of 2007 and by 3.6 per cent the following year. In London, tender prices are forecast to increase by 5.5 per cent over the next year, and by a further 5.4 per cent in the year to the first quarter of 2008. Infrastructure tender prices are forecast to increase by 5 per cent over each of the next two years The London Olympics workload is expected to kick in from mid 2007 and the spend profile shows workload peaking in mid 2010, easing back and then showing a surge in activity from the end of 2011 to the middle of 2012 as temporary Olympic facilities are constructed. While the Olympics will only add some 1.5 to 2 per cent to workload in the capital, there can be expected to be 'pinch points' for certain materials and labour skills which will create temporary localised price hikes. In broad terms, the expectation is that the Olympics workload will bump up prices by 1 to 1.5 per cent, and these figures are included in the E C Harris forecast.

INFRASTRUCTURE Despite a fall in output, growing optimism in the infrastructure sector throughout 2005 was reflected in the value of new orders for the entire year, which was a total of 40 per cent up on the previous year.

Whereas workload in the rail sector is fairly level, the water and road sectors are up 50 per cent on last year, with signs of even more improvements ahead in the water sector. The high level of activity in the roads sector has seen new orders in 2005 at the highest level for three years.

The increasing infrastructure workload should provide a stable workload platform. To add to the squeeze, shortages of resources still prevail and these will further strengthen the platform for price increases.

BUILDING ACTIVITY Despite last year's fall in activity, the new-orders figures for the three months to November 2005 were 6 per cent higher than for the previous three months and 20 per cent higher than for the same period of 2004. The figures promise much for workload ahead and reinforce the Experian forecast of three years of steady growth.

Increased spending on health and education should boost workload, although a deterioration in the government's finances could see a deliberate slowdown in the rate of investment.

The other main building sector, commercial offices, is expected to continue to recover over the next three years. One stimulus to investment could be the introduction of Real Estate Investment Trusts, which were given the go-ahead in the last budget and which could boost investment in commercial property.

Despite all the talk about investment in public housing, output in the sector fell by 7 per cent last year. The forecast is that social-housing output will increase by 6 to 7 per cent over each of the next three years.

TENDERS With risk aversion the name of the game, two-stage procurement is now the expected route for larger schemes, with single-stage design and build receiving little interest. On major schemes there is a finite number of contractors who have the expertise, and the assembly of the 'right' team is seen to be paramount.

Schemes that are less than straightforward, such as refurbishment projects or 'cut and carve' jobs, are becoming more difficult to tender as contractors become more selective. Some improvements in response can be ensured by supplying quantified pricing schedules which make the job easier to price.

SURVEY HIGHLIGHTS Construction activity:

construction output in the third quarter of 2005 showed no change on the previous quarter, and no change compared with the third quarter of 2004; and

construction output forecast is to rise by 1.7 per cent this year, 3.2 per cent in 2007 and 3.7 per cent in 2008.

Input costs:

contractors' input costs rose by 3.7 per cent over the past three months, but previous falls mean they have increased by just 2.5 per cent since February 2005;

skilled labour costs increased by 3.8 per cent over the last three months, and by 3.8 per cent since February 2005; and - materials prices increased by 3.6 per cent in the past three months, but 1.7 per cent over the past year, because of earlier falls.

Workload forecast:

private commercial sector to increase by 3 per cent this year and by 6 per cent in 2007 and 2008;

infrastructure output to bounce back from a 9 per cent drop last year, to show rises of 4 per cent in 2006, 5 per cent in 2007 and 4 per cent in 2008; and - public non-housing sector to see no change in 2006 and then increases of 2 per cent in 2007 and 2008.

Tender prices:

tender prices forecast to rise nationally by 4 per cent over the next year, slowing to 3.6 per cent in the year to the first quarter of 2008.

tender prices in London to rise 5.5 per cent over the next year and by 5.4 per cent over the following year, as Olympics projects start to affect prices;

over the longer term, tender prices in London to rise by 5.5 to 6 per cent a year to the end of 2010, and slow down only gradually thereafter; and - infrastructure tender prices to increase by 5 per cent over each of the next two years.

Paul Moore is head of cost research at E C Harris

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