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We look at the continuing growth in construction activity and costs, and the aspiration to improve productivity targets

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Construction prospects

The overall trend of growth in new orders since the low of 1992 is continuing, although the annual total has yet to regain the level attained for 1993 driven by the exceptional level of orders secured in the fourth quarter of that year. New orders remain more than 15 per cent below the level of the 1989 peak of the 1980s boom.

It is generally believed that the level of activity will continue to expand, albeit at a reducing rate, through to the millennium. Most commentators are now concerned with assessing how severe any decline in activity will be in the early years of the new millennium, whether other sectors will compensate for the anticipated downturn in commercial activity, and the extent of any new economic stability that successful European Union developments may achieve.

The south-east of England has seen the greatest increase in construction activity over the last few years, but the decline in millennium projects as the year 2000 approaches and the anticipated decreases in commercial work are likely to see an end to the substantial increases in workload. The strength of the pound is hitting manufacturing industry very hard and this will have a direct impact on the industrial building sector which has been growing strongly over the last two years.

Costs and tender forecasts

Building cost increases continue to run at levels above price increases in the general economy. Labour costs are being driven up by skill/resource shortages, with pay increases of 10-15 per cent in the last year across the country and increases in the South-east significantly greater than this - rates for key operatives there are exceeding £100 per day, with carpenters, joiners and bricklayers in particularly short supply.

In contrast, materials costs are increasing at less than 2 per cent per year, with a particular boost resulting from the strength of the pound generally and the crisis in Asia in particular. Raw materials costs for manufacturing have fallen by 5-10 per cent over the past year. Timber and related imports from the Far East have reduced in price and, despite strong demand, the costs of cement and steel are being restrained by the competitive prices of imports.

Overall, building costs have increased by 2.4 per cent over the past year and are expected to rise by 4-6 per cent over the next year.

Tenders, after increasing significantly towards the end of 1997 and early this year, are now showing more modest increases. Tender prices rose by 7.2 per cent over the past year and are likely to increase by 5-8 per cent over the next year. Contractors are finally achieving profitable turnover but continue to need to concentrate upon securing new contracts and maintaining full order books as the rate of increase in new work declines. The rate of increase in tenders will continue to exceed costs over the next two years.

The impact of the Inland Revenue's stricter rules on self-employment has been varied. Some contractors have found that the costs of directly employed operatives have added up to 20 per cent to wage costs, to ensure comparable take-home pay. However, this has coincided with a time when market rates are rising and when unions have secured significant increases in base rates. Taking self-employed operatives who held 714 or SC60 certificates on to the payroll results in companies incurring the additional costs of employer's National Insurance contributions, sick and holiday pay, plus additional accounting costs.

Improving productivity targets

The Construction Act has imposed some of the administrative aspects of the Latham Report on construction projects, with particular emphasis upon options to reduce the costs of conflict. It remains to be seen how effective these measures will become.

A major component of the Latham Report was the proposal that improved working practices and relationships between the parties involved in construction should lead to significant cost savings. Sir John Egan is responsible for a government task force to improve construction efficiency and is proposing lean production as a key to generating improved productivity.

Government statistics indicate that some improvements may already have been achieved, since a comparison of employment and output between 1997 and 1990 shows that employment is at 75 per cent of 1990 levels, at a time when output has recovered to over 90 per cent of 1990 levels. This probably helps to account for the fact that tender prices have only just returned to the levels of 1989-90 ,despite an increase in construction costs of nearly 30 per cent over the same period.

Prepared by Brian Rowntree, head of research and development at The mda Group uk, construction industry consultant

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