Cost update: March 2009

01 / Key changes

• The cost indices continued to rise into the fourth quarter last year
• The building and mechanical cost indices will have fallen in the first quarter
• The electrical cost index will have risen in the first quarter owing to a wage increase for electricians
• Consumer prices are dropping quickly
• General industry input and output prices are stable
• Construction materials prices are falling
• Steel and non-ferrous metals prices are in sharp decline
• Construction earnings are down from this time last year

Building cost index The annual increase grew in the fourth quarter of last year to 7.3%, its highest level for 10 quarters. It will drop in the first quarter of this year.

Mechanical cost index The rate of increase leaped to 5.2% in the fourth quarter. Wage rates for heating and ventilating operatives rose 4% in October and materials prices rose until the end of the year.

Electrical cost index This rose by a similar amount to the mechanical cost index over the last year but materials prices peaked in September and have been falling since.

02 / Price adjustment formulae for construction

These indices, compiled by the business and enterprise department and the Office for National Statistics, are to help calculate costs changes on fluctuating or variation of price contracts.

Over the 12 months between March 2008 and March 2009, the 60 work categories have recorded an average rise of 4.2%, down from 7.6% four months ago. However, many categories started to decline in the second half of last year. Since last July, the month the 2008 building wage award came into effect, the work categories have fallen by 1.1%.

Since July 2008 the work categories showing the greatest change have been:

The largest reductions have occurred in categories involving steel and non-ferrous metals. Steel prices in Europe have fallen more than 40% since last July with reinforcement prices dropping 50%. In the UK the falls have been less extreme but still significant (see Materials, below).

Most non-ferrous metals prices peaked about the same time: aluminium prices, for instance, have fallen by 60% since mid-July.

Three of the five categories recording cost increases are related to plumbing and reflect a wage increase that came into effect in January.

Materials: The price of materials in all sectors has turned south in the past six months

03 / Executive summary

• Consumer price inflation is expected to continue to fall
• Oil prices ease industry’s input costs
• Industry output prices static
• Construction materials prices declining across all sectors
• Fall in the value of sterling affecting cost of imported materials
• Steel and non-ferrous metals prices in reverse

04 / key indicators

(See file attached)

Labour: Some trades have secured good rises, but others are likely to lose out

05 / Executive summary

• Over the past three months of 2008, average earnings in construction were 1% lower than a year before, while average earnings throughout the economy rose 3.2%
• The start of the year brought in wage increases of 5% for plumbers and 4.5% for electricians (see below)
• Other agreements gave steel erectors 6.6%, thermal insulation contractors 6% and flat glass operatives 3%
• Negotiations between employers and unions for a revised wage agreement for building operatives, due at the end of June, seem unlikely to secure an increase of similar magnitude.

Plumbers

Plumbers in England and Wales received an increase in basic wage rates worth 5% from 5 January 2009 in a deal agreed in September 2007. The deal provided for wage increases of 4.5% but with a safety net that, should the retail prices index exceed this figure in September 2008, rates and allowances would be increased by that amount. Fortunately for plumbers, the RPI peaked in September at 5% and rates consequently increased accordingly.

The current basic hourly rates of pay for the principal grades of operatives are now as follows:

Wage rates for plumbers in Scotland and Northern Ireland will increase by 4.6% on 1 June.

Electricians

Wage rates for electricians rose by 4.5% from 5 January 2009 in accordance with the second part of a three year agreement determined in September 2007. The new national standard rates became: