Cost update: March 2002

<B><font size="+1">Hot rates: Common work items</b></font>
This quarter, Hot rates examines a basket of commonly encountered work items. Materials price changes over the last year may have been benign but labour costs have pushed up again and tender prices have continued to rise, albeit at a slower rate than over the previous three years (see "Tender price forecast", 25 January, pages 62-64).
The table to the right shows "typical" and "keen" rates, compiled from successful tenders received by Davis Langdon & Everest over the last three months. The figures are taken from traditional competitively let medium-sized contracts in the £1-3m value range in the south-east of England. Rates relate to standard method of measurement items and generally exclude separately measurable labour and other incidentals.
The rates are exclusive of preliminaries, but do include for profit and overheads at present market levels.
Rates in most other regions of the country are likely to be lower. The table of regional variation factors on page 59 may be used to provide an indication of likely rates elsewhere, though there may be variations from trade to trade.
The rates exclude the forthcoming aggregates tax which will impact on quite a number of trades after April.

<B><font size="+1">Building costs</b></font>
<B>Retail prices</b>
Latest figures on consumer price inflation released by the Office for National Statistics show a sharp increase in annual inflation rates. The retail prices index for January 2002 shows a year-on-year increase of 1.6%, compared with only 0.9% in December. Similarly, the RPIX index – retail prices excluding mortgage interest payments – rose from 1.9% to 2.6% on an annual basis. This is the index against which the Bank of England attempts to control inflation at 2.5% and so is now just about spot on.
However, this rise in the annual rates was not caused by any surge in prices in January: in fact the RPI in January actually fell marginally compared with the December figure, and the RPIX remained at the same level as in December. The jump in the annual rates was caused by a sudden fall that occurred in the index figures in January 2001, largely as a result of heavy discounting on clothes and household goods. Newspaper claims that this apparent "surge" in inflation will have to be tempered by higher interest rates will prove to be short-lived as next month the annual figures will almost certainly return to about 1% for the RPI and 2% for the RPIX as the "quirk" from January 2001 is removed from the equation.
In fact, retail inflation has increased only a little over the last nine months, as shown in the first column in the table (right). This is in large part a result of the fall in oil prices in the second half of last year. The Bank of England believes that retail inflation will remain roughly at current levels for the next year or so before edging up towards the 2.5% target by the beginning of 2004.

<B>Input costs</b>
Materials and fuel purchased by the manufacturing industry generally have fallen in price 6.3% over the last 12 months, with a 7.9% fall in materials prices offset a little by a 5.3% rise in fuel costs. The annual figure has now been negative since July last year, returning to the trend of 1998/99. The principal component behind this trend was the fall in crude oil prices in the second half of last year but prices have now stabilised following cutbacks in production.
A fall of 13% in the price of imported metals over the last year also contributed substantially to the overall fall in the index. The Economist index of non-oil commodity prices dropped in autumn last year to its lowest level since 1977. However, the price of imported metals may have bottomed out in November last year and have eased up slightly in the last two months.
The ONS index of input prices now includes the effect of the climate change levy. The ONS estimates that the levy has added between 0.8 and 0.9% to the main input index since April 2001, without which the fall in the annual index would have been that much greater.

<B>Output prices</b>
In line with the negative trend of input costs, annualised inflation figures for output prices of manufactured products have also been negative for most of the last six months, a situation that has never occurred at any time since this series began in 1974. Again, this situation was almost entirely the result of the decline in the price of petroleum products.
Excluding food, beverages, tobacco and petroleum products, the index is just positive but the annual figure has not exceeded 0.5% at any time over the last year and the maximum annual increase over the last four years has been 1.1%. With the negative inflation in input costs of the last six months, the short-term outlook for output prices is not likely to change from the recent low inflationary trend.

<B>Construction materials</b>
ONS statistics show that construction materials prices have risen 0.7% over the last year and housebuilding materials slightly more at 1%. However, both series have been in decline since August last year, both falling 0.5% over this period. Since preparation of the 2002 Spon's Price Books, construction materials have declined 0.3% overall.
Mechanical and electrical engineering materials have been similarly restrained in price, UK-manufactured products rising 1.1% and 0.8% respectively over the past year. In recent times inflation in engineering materials has been generally lower than that of construction or housebuilding materials.
With sterling's exchange rate fluctuating only mildly over the last year and eurozone inflation relatively benign, imported components will not generally have risen much more in price.
Although the general statistics suggest that construction materials prices overall have declined fractionally since compilation of the 2002 Spon's Price Books, a number of specific price increases have been identified, particularly as manufacturers and suppliers have issued revised price lists at the beginning of the year.

<B><font size="+1">Labour costs</b></font>
<B>Electricians – Scotland</b>
Last July, the Scottish Joint Industry Board for the Electrical Contracting Industry agreed a three-year wage settlement for electricians, setting rates through to January 2005. "Travel rates", for operatives who provide their own transport and are required to start and finish at the normal start and finish times on jobs, are the same as the national standard rates subsequently set by the Joint Industry Board for the Electrical Contracting Industry. "Shop rates" apply to operatives who book on and off at the employer's "shop", and is a category no longer in use by the JIB.

<B><font size="+1">Regional variations</b></font>
The table below indicates how building prices vary around the country. The figures are averages and, inevitably, not all trades or items of work will vary exactly in line with the differences shown. The principal driving force behind the variations is differing labour rates between the regions.
The table indicates current variations in price level from outer London for the various regions of the UK It also shows a forecast first quarter 2002 tender price index for each region, and the percentage adjustments advised to the major works measured rates section of Spon's Architects' and Builders' Price Book 2002.

<B><font size="+1">Aggregate tax</b></font>
The aggregates levy received royal assent in May with the passage of the Finance Act 2001. The levy will become operative everywhere except Northern Ireland on 1 April 2002, although, at the time of going to press, regulations to implement the tax have still not been published.
The tax is a charge on the exploitation of aggregates in the UK and its territorial waters.
It is intended to ensure that the environmental impact of aggregates extraction is reflected in prices, to encourage the greater use of recycled and alternative materials and to support the regeneration of quarrying sites. In Northern Ireland, the introduction of the aggregates tax has been deferred until 2003 and will be phased in over a period of up to five years.
The levy will be charged at a single flat rate of £1.60 a tonne of crushed rock, sand and gravel extracted or dredged in the UK for aggregates use. The tax will also apply to imported aggregates (worth about £14m last year) but will not apply to imports of products manufactured with aggregates, such as concrete blocks. Imports of concrete blocks, bricks, roofing tiles and paving were worth about £12m last year; a very small percentage of the total used in this country, but increased competitive advantage may now encourage this figure to rise.
There will be a substantial impact on civil engineering projects employing large quantities of aggregates such as roads, railways and airports but also a significant impact on any building work employing concrete or concrete-based products as well as aggregates in their primary state. It has been estimated that between 20 and 25% of aggregates are used for road maintenance and construction. There is reckoned to be a £5bn backlog of road repair work required in the UK and the tax will further limit authorities' ability to undertake necessary work within existing budgets.
The use of recycled materials accounts for about 18% of the aggregates market. The government has set a target to double recycling by 2006, which this measure should go some way to encourage. However, the British Aggregates Association claim that only an additional 2-3% recycling is possible. Furthermore, it is likely that the cost of hardcore and recycled materials will also rise as demand for these products increases.
The levy is expected to generate about £385m a year. To balance the income raised, there will be a 0.1% reduction in employers' National Insurance contributions from 6 April 2002. This is a similar measure to that introduced at the time of the climate change levy, to make the tax "revenue-neutral" and shift taxation away from "goods", such as employment, to "bads", like pollution. In addition, a £35m-a-year sustainability fund will be introduced in April 2002 to encourage a reduction in the use of virgin materials and deliver environmental benefits to communities affected by quarrying.
Certain quarried or mined products such as coal, slate and shale are exempt from the tax. Other items that come under this heading include clay, flint, gypsum, metals and metal ores, perlite and vermiculite. Blocks of stone used for paving, facing or repairing buildings will be outside the scope of the levy; limestone used for the production of lime or cement will be exempt.

<B><font size="+1">Landfill tax</b></font>
From 1 April 2002 the standard rate of landfill tax (for active waste) rises again from £12 a tonne to £13 a tonne. The new rate will apply to any standard-rated disposal made, or treated as made, on or after 1 April 2002.
The rate has risen steadily since it was first introduced in 1996 at a rate of £7 a tonne. The tax of £2 per tonne on inactive waste remains unchanged.
This tax, too, is designed to take account of environmental costs arising from disposals to landfill and to encourage efforts to minimise waste and develop more sustainable waste management techniques such as recycling. The tax has been deemed a success: as quickly as 1988 an assessment indicated that it may have led one third of companies to introduce or step up efforts to minimise, reuse or recycle wastes.
It is intended to continue to raise the rate for active waste by an additional £1 per tonne for at least another two years, bringing the standard rate of tax to £15 per tonne by 2004.

<B><font size="+1">Cost effects</b></font>
The Treasury has estimated that the levy will raise about £385m a year. The value of construction output in Great Britain in 2001, including infrastructure but excluding repair and maintenance, was about £39bn.
On this basis, the additional cost will amount to an average tax across the industry of just under 1%. Elements attracting the tax will be disproportionately higher in infrastructure works and some parts of the repair and maintenance sector, thus reducing the average percentage for the new-build sector.
The Civil Engineering Contractors Association has predicted that the tax will push up total construction prices in the civils sector by 1.3%. Other models have come up with much higher figures than this but, for any particular project, it will of course depend on the constituents and type of work involved.
An "average" building project may attract an increase as a result of the tax, assuming no changes in specification or sourcing of materials, of between 0.8 and 1%. The Treasury's revenue estimate must allow for a considerable increase in the use of recycled or alternative materials. If this does not happen, the "take" from the tax could prove to be significantly higher.

<B>Specific cost effects of the tax</b>
Sand, aggregate, granular fill, roadstone £1.60 a tonne (approx. £2.30 – 2.90 /m3)
The British Aggregates Association has suggested that the additional cost imposed by quarries is more likely to be in the order of £2.65 a tonne on mainstream products, applying an above average rate on these in order that by-products and low grade waste products can be held at competitive rates, and allowances for administration and increased finance charges.
At the moment, quarries suggest that they will be passing on only the basic £1.60-a-tonne tax from 1 April but many are also raising prices from 1 March 2002 by £0.60 to £0.85 a tonne.

<B>Ready-mixed concrete</b>
A cubic metre of concrete contains between 1.9 and 2.4 tonnes of sand and aggregate. Ready-mixed concrete suppliers are set to increase prices, reflecting increases in cement and aggregates, by £2-3.50/m3 from the beginning of March and from £3-5 from 1 April, generating a total increase of £6.50-£7/m3. This represents an increase of 12.5-15% on the price of ready-mixed concrete.

<B>Precast concrete blocks</b>
A number of concrete block manufacturers are increasing prices from 1 April by 6–7.5% plus the aggregates tax at 30p/m2 for 100 mm dense aggregate blocks and 10p/m2 for 100 mm lightweight aggregate blocks. There are currently no announced price increases on aerated concrete blocks.

<B>Concrete roof tiles</b>
Price increases of £6-10 per 1000, generally depending on the size of tile, are being introduced on 1 April as a result of the Aggregates Tax (equating to 10-50p/m2 of roofing).

<B>Precast concrete paving</b>
Concrete pavings, flags and blocks are rising on 1 April by 5-9% inclusive of the aggregates tax, which is reckoned to account for 2-5% of this figure.

<B>Bitumen macadam paving</b>
Prices for base and binder course materials rose by £1.70 a tonne and surface courses and hot rolled asphalts by £2 a tonne from the beginning of March. Together with the aggregates tax of £1.60 a tonne from 1 April, bitumen macadam paving rates can be expected to rise by about 5%.

<I>Footnote:
The British Aggregates Association has launched a legal challenge to the introduction of the aggregates tax, arguing that the tax is illegal: they claim it contravenes EC law by distorting competition and the European Convention on Human Rights as the tax cannot be justified.</I>