Cost update: December 2007

01 Key trends

Most measures show year-on-year inflation has risen less than in the recent past. The building cost index shows inflation is still above 5% (as in the past five quarters). This index is significantly higher than other measures, although it has been declining gradually over the past year. Materials price rises remain higher than others.

The annual rate of inflation in the electrical cost index has also been in gradual decline since its 5.6% in the third quarter of 2006. Copper prices are falling again, which should enable this to continue.

The mechanical cost index has fallen even more sharply since its 7.1% in the third quarter 2006. Year-on-year inflation at 3.6% is the same as last quarter, but the recent decline in copper prices may see this fall further next quarter.

The consumer prices index dropped to 1.8% in the third quarter, its lowest return since 2005, but this is about to reverse.

Guide to data

Davis Langdon's cost indices track movements in the input costs of construction work in various sectors, incorporating national wage agreements and changes in materials prices as measured by government index series. They provide an underlying indication of price changes and differential movements in the various work sectors, but do not reflect changes in market conditions affecting profit and overheads provisions, site wage rates, bonuses or materials price discounts and premiums. Market conditions are recorded in Davis Langdon’s quarterly market forecast (last published 7 September).

02 Price adjustment formulae for construction

Price adjustment formulae indices calculate cost changes on fluctuating or variation of price contracts and provide guidance on the work sections in Spon’s Price Books. In October 2006-2007, the 60 work categories recorded a rise of 4.7%, down 0.6% from three months ago.

At the beginning of this year, lead prices took off again (having doubled between June 2006 and February 2007). By mid October, they touched £1,950 a tonne, having started the year at £875. However, over the past month they have collapsed, falling back below £1,400. The increase was in response to a continued shortfall in supply and a fall in the London metal exchange’s stock to less than a single day’s supply. Stockpiles have now risen and metals prices have fallen, amid concerns about a slowdown in the global economy.

The same fears have caused zinc and aluminium prices to fall. By late November, zinc prices had halved from a year ago.

Timber is leading the materials price table (see opposite), causing double-digit inflation in windows, doors and structural work.

Since July 2007, when the building operatives’ wage award came into effect, there has been an increase in the 60 work categories of 0.6%. With lead prices now in possible freefall, the index for lead cladding and covering prices has probably peaked. The zinc index has been falling since July and has clearly got further to go.

Materials

The consumer price index is almost spot-on the government target inflation figure and price rises have eased to 6.7% from 10.1% last year

03 Executive summary

• Consumer price inflation on target, but expected to rise owing to higher oil prices and the weakening pound
• Input costs surge
• Gas prices leap upwards
• Output prices at highest for nearly 12 years
• The rate of construction materials price increases easing in the second half of the year
• Timber and steel prices still lead construction price inflation

04 Key indicators

The annual percentage change in the CPI is now almost spot-on the government's target inflation figure of 2%, after being above it from May 2006 to June 2007. The Monetary Policy Committee brought the rate of inflation down to below 2% between July and September, but the rate now seems to be rising again, driven by higher petrol and food prices. The Bank of England's November report expects higher inflation in 2008, reflecting higher energy and import price inflation.

Annual inflation for industry's input costs rose from 0.7% in August to 8.6% in October, largely owing to crude oil prices and fuel costs. Oil prices rose 15% in September and October and have since risen from about £40 a barrel in mid October, approaching £47 at the end of November. Fuel rose 11% between August and October, with gas rising 26.6%. October saw prices rise 33% from their low point in June. This matches the increase in October 2004, when prices went on to rise another 29% over the winter. In 2005, prices had risen only 21% at this period but peaked in December with an increase of 127%.

Output prices have been fairly steady over the past year, but a 0.6% rise in October took the annual inflation rate to 3.8%, the highest figure since November 1995. These were attributed to rises in petrol and food products so the narrower range above (excluding food, beverages, tobacco and petroleum products) rose only half as much in October and the annual rate of inflation has been steady at about 2.3% over the past year. The sharp rise in input costs, however, is likely to see output prices taking an upward turn.

Materials prices rose 6.7% over the year to September, in contrast to the 10.1% at the end of last year. M&E prices have risen more over the past six months but have now stabilised.

Timber products continue to lead the price rises. Imported softwood prices rose 25% over the past year and 15% over six months and still appear to be rising. This seems likely to continue as European timber producers increase their exports to China and the Middle East.

Non-ferrous metal prices have stabilised: aluminium has eased downwards and this is reflected in the price of aluminium bars. World and European steel prices have been fairly steady, although UK fabricated steel prices have still been edging upwards. New rises are expected in 2008, owing to escalating raw material costs.

ONS figures identified a fall in ready-mixed concrete and mortar prices over the past year. Nevertheless, suppliers have already announced price increases at the turn of the year for aggregates, mortars and concrete of up to 10%, so it will remain to be seen whether the price rises can be made to stick.

Labour

Construction wages have risen, but not as much as everybody else’s …

• Steel erectors and crane drivers saw the biggest increase in wages
• Floor and wall tilers and bricklayers suffered a fall in weekly pay
• Scaffolders topped the weekly pay league, typically earning £600
• The new year will usher in 4-4.5% wage increases for plumbers and heating and ventilating operatives
• From July to September, earnings in construction rose 2.9% over the previous year, compared with 4.1% in the economy as a whole

The Office for National Statistics’ 2007 Annual Survey of Hours and Earnings showed that construction earnings rose by just 2.5% between April 2006 and April 2007.

Skilled construction and building traders typically worked 40 hours per week, exactly the same as the previous year. However, crane drivers typically worked 50 hours per week and scaffolders 44 hours, helping boost their weekly pay.

National wage agreements

Building operatives wage rates will increase in June 2008 by 6% as the third part of a three-year deal brokered in May 2006. More recently agreed deals for plumbers and electricians will see their basic rates rise in January at a more conservative 4.5% and 4% respectively, in line with the 4% that heating and ventilating operatives will receive next September.