Cost update: December 2006

01 — Key trends

(Up) Construction materials prices rising at record pace
(Up) Steel prices beginning to dominate headlines again
(Up) Mechanical and electrical services costs being driven up by prices for non-ferrous metals
(Down) Labour wage awards lowest for number of years
(Up) More materials price rises due in January

The three measures of construction cost inflation – building, mechanical and electrical – continue to climb away from inflation, measured by the Consumer Prices Index. The Building and Electrical Indices have increased over the past six years at similar rates (average 5.5-5.7% a year), with the lines on the graph criss-crossing depending on the timing of the different industry wage awards. The Mechanical Index has risen at a slightly lower rate (average 5.1% a year) while the Consumer Prices Index has averaged rises of 1.5% a year in this period.

The Building Cost Index has risen 5% over the past year, slightly below its six-year trend, even though materials inflation is running at record levels. The summer wage award, an increase in basic rates of just 3.5%, was the lowest annual rise over this period.

The Mechanical Cost Index, up 7.1%, has recorded its highest annual inflation figure since 2003, as materials prices stretch new limits. With copper prices down from highs earlier in the year and a wage award of just 3.5% in November, the fourth-quarter inflation figure should return to close to its normal six-year trend.

The Electrical Cost Index, up 5.6%, is in line with its six-year trend but is likely to rise over the next two quarters as materials inflation works through and a 5% wage award comes into effect in January.

(See attached graphic below "Davis Langdon indices")

02 — Price adjustment formulae for construction

Price Adjustment Formulae indices, compiled by the Department of Trade and Industry and Office for National Statistics, are designed for calculating increased costs on fluctuating price contracts. They provide guidance on cost changes in various trade and industry sectors and on the differential movement of work sections in Spon’s Price Books.

Between October 2005 and October 2006, the average change in the 60 work categories has been +7.1%, influenced by a few high rises:

Cladding and covering: copper +35.2%
Pipes and accessories: copper +33.5%
Cladding and covering: zinc +30.6%
Concrete: reinforcement +22.4%
Waterproofing: asphalt +19.9%

The first two are the result of the doubling of copper prices between October 2005 and May 2006, although prices have since eased back. Zinc prices have trebled since October 2005. Reinforcement prices have been rising since the start of 2006. Asphalt prices have risen as oil prices peaked in August.

The building industry wage award came into effect at the end of June and was reflected in most work categories from July. Since then, the average rise in the categories has been 1.3%. The biggest rises have been:

Concrete: reinforcement +10.6%
Waterproofing: asphalt +8.6%
Metal: decking +6.5%
Pavings: coated macadam and asphalt +5.5%

There have also been drops in some categories, including:

Windows and doors: aluminium –4.4%
Pipes and accessories: copper –3.7%
Cladding and covering: aluminium –3.3%
Cladding and covering: copper –2.2%

Aluminium prices have fallen by up to 20% after a sharp but shortlived spike in May.

Materials

Rising metal and fuel prices continue to hit the construction industry, with steel and electricity recording the sharpest increases

03 — Key trends

(no change) Consumer price inflation remains above government target and Monetary Policy Committee acts to dampen economy
(down) Manufacturers’ input prices have fallen in the past three months
(up) Construction materials prices rising at record pace …
(up) … and still accelerating
(up) Double-figure inflation in mechanical and electrical services materials over the past year …
(down) … but now in decline
(up) Steel and timber prices rising most sharply because of European demand

04 — Key indicators

(See attached PDF below "04 - Key indicators")

Labour

Heating and ventilation workers won a 3.5% wage agreement last month which, although in line with average earnings, is one of the lowest awards in construction for years

05 — Executive summary

The recently agreed heating and ventilating wage award was less than the unions had originally tabled and, at 3.5% in the first year, was at the bottom end of the range of other construction industry agreements but the same as other major groups:

Building and civil engineering operatives (CIJC) 3.5% (June 2006)
Plumbers 3.5% (January 2006)
Steelworkers 3.5% (April 2006)
Electricians 4.5% (January 2006)
Demolition workers 5.5% (July 2006)

Three-and-a-half per cent is the annual growth rate in the three months to September 2006 for average earnings excluding bonuses for the UK’s whole economy, though average earnings in manufacturing over this period were higher at 4.4%.

After protracted negotiations, a three-year wage agreement for operatives in the heating and ventilating contracting industry came into effect on 6 November, providing an increase of 3.5% in all hourly wage rates and allowances. There will be another 3.5% increase in September 2007, followed by a 4% rise from 6 October 2008.

Hourly rates of wages from 6 November 2006 (£/hr)

Foreman 13.66
Senior craftsman 11.29
Craftsman 10.35
Installer 9.39
Adult trainee 7.91
Mate (18 and over) 7.91
Mate (16-17) 3.67

Modern apprentices

Junior 5.14
Intermediate 7.28
Senior 9.39

(See table attached below "Wage agreement summary")