This quarter, Davis Langdon & Everest examines preliminaries percentages of four case studies, plus the latest price change information for labour and materials, including the first effects of the new aggregates levy

  • Hot rates: Preliminaries
  • This quarter's Hot rates looks at preliminaries. As the construction market picked up in the late 1990s, average preliminaries percentages also rose from a single figure into double figures. By 2000 and 2001, average preliminaries on competitively tendered lump-sum projects were typically 12-13%.
  • At the end of last year, preliminaries percentages slipped a little as contractors trimmed this section of their tenders in the nervousness that followed the events of 11 September.
  • Although overall tender prices have continued to nudge upwards (see Tender price forecast, Building, 3 May), preliminaries as a percentage of other work remain closer to 10-11%. However, this average hides a wide array of figures that may be encountered in tenders depending on the particular characteristics of a project.
  • Current prelims levels are illustrated by four model case studies below.
  • <B>Building materials</b>
  • <B>Consumer price inflation</b>
  • The government's preferred measure of inflation, the Retail Prices Index, excluding mortgage interest payments (RPIX), increased 0.7% in April. The increase was mainly attributed to a rise in leisure services and housing costs.
  • On an annual basis, the index remains just below the government's target of 2.5%. Annualised figures within RPIX have remained in a fairly tight band over the last three-and-a-half years (1.8-2.7%).
  • UK inflation, as measured by the Harmonised Index of Consumer Prices, has remained below the European Union average throughout that period. The generally lower inflation figures measured by the HICP over the past three years are largely due to the exclusion from the index of owner–occupiers' housing costs.
  • <B>Input costs</b>
  • The costs of materials and fuels purchased by industry generally over the last year continues to be negative, falling 3.6% over the 12 months to April. The rate of decline has eased since last November, when input prices showed a fall of 9.9% over the previous year. Most recently, the index has shown a slight increase following the rise in crude oil prices. Over the year, however, crude oil still shows an overall decline. Between March and April this year, prices of imported materials as a whole rose 2%, but still show a decline of 4.6% over the year.
  • The effect of the aggregates levy has not yet been included in Office for National Statistics figures, but has been initially estimated to add less than 0.25% to the main input index and less than 0.5% to the index, excluding food, beverages, tobacco and petroleum industries.
  • <B>Output prices</b>
  • Output prices of manufactured products generally have been rising gently every month since December 2001 and the rolling 12-month annual percentage change moved to positive in April for the first time since August 2001. Between March and April, the index rose 0.5%, mainly reflecting rises in petrol prices. This is the largest month-on-month increase for a year-and-a-half and comes in response to the increase in input costs. The index has now risen 1% in the five months since November last year; however, again, almost entirely due to the increase in petrol prices, which have been increasing since February.
  • Other price increases remain generally benign. Output prices of manufactured products excluding food, drink, tobacco and petrol have risen just 0.2% over the past year, 0.5% over the past two years and 1.3% over the past three years.
  • <B>Construction materials</b>
  • ONS statistics shown in the table above exclude the effect of the aggregates tax introduced on 1 April (see Cost update, Building, 8 March), but nevertheless show an increase in construction materials prices of 0.6% between March and April, the largest single monthly increase since March 2002. This single month figure accounts for the bulk of the increase registered over the last year (just 1%). Housebuilding materials have registered a similar increase over the last 12 months (0.9%) with the bulk of the rise (0.6%) occurring in April.
  • ONS statistics show just a 1% increase overall in construction materials over the last year, but this figure hides a considerable number of significant price increases in individual materials.
  • The increases in material prices in the table above include rises resulting from the aggregates levy. As usual, supply-chain economics may dictate that not all of these price changes are eventually passed on in full.
  • <B>Labour prices</b>
  • <B>New wage rates</b>
  • In March, the Building and Allied Trades Joint Industrial Council, the partnership between the Federation of Master Builders and the Transport and General Workers Union, announced new wage rates for the 200,000 building workers employed by the small and medium-sized building firms who come under the umbrella of the FMB. From 10 June 2002, the new basic hourly rates (based on a 39-hour week) will be:
  • <table width="100%" bgcolor="#E4EDF8"><tr><td width="50%">Craftsmen</td><td>£7.30 (up from £6.70)</td></tr><tr><td width="50%">Adult general operatives</td><td>£5.65 (up from £5.42)</td></tr></table>
  • These figures represent a 9% increase for craftsmen and a 4.2% rise for adult general operatives.
  • Skill rates, such as for crane operators, and additional rates of pay, such as for dumper drivers, will also rise 9%. Travel allowances rise 4.2%.
  • This wage agreement will remain in force until 8 June 2003.
  • Craftsmen rates remain in line with pay rates under the CIJC agreement (see table) but adult general operatives continue to earn a higher rate than the CIJC general operative.
  • <B>Pay and conditions</b>
  • In June 2000, the Construction Industry Joint Council accepted recommendations for a three-year agreement on pay and conditions, increasing basic pay rates 21% over the next three years. The third and last part of the agreement comes into effect on 24 June 2002 and provides for the largest of the three annual rate rises. Basic pay rates for all grades will rise 9% from that date:
  • <table width="100%" bgcolor="#E4EDF8"><tr><td>Craft rate</td><td>£7.30 (up from £6.70)</td></tr><tr><td>Skill rate 1</td><td>£6.95 (up from £6.38)</td></tr><tr><td>Skill rate 2</td><td>£6.70 (up from £6.15)</td></tr><tr><td>Skill rate 3</td><td>£6.27 (up from £5.76)</td></tr><tr><td>Skill rate 4</td><td>£5.91 (up from £5.43)</td></tr><tr><td>General operative</td><td>£5.49 (up from £5.04)</td></tr></table>
  • Additional payments for skilled work will also rise 9%.
  • Daily fare and travel allowances are now index linked and the allowances that will apply from 24 June have risen 1.3% in line with retail price inflation.
  • The agreement made in June 2000 stipulated that no further changes in operatives' pay and conditions would take place before 30 June 2003.
  • Rates of pay for apprentices were recently introduced into the Working Rule Agreement. Prior to that, the Construction Confederation published apprentice wage rates for guidance only. In consequence, all apprenticeships commencing on and after 24 June 2002 shall be subject to a new working rule – WR 1.5 Conditions of Employment of Apprentices. The rule sets out basic hourly rates of apprentice wages as follows:
  • <table width="100%" bgcolor="#E4EDF8"><tr><td>Year one</td><td>£2.95</td></tr><tr><td>Year two</td><td>£3.64</td></tr><tr><td>Year three without NVQ2</td><td>£5.13</td></tr><tr><td>with NVQ2</td><td>£5.75</td></tr><tr><td>with NVQ3</td><td>£7.30</td></tr><tr><td>On completion of Apprenticeship with NVQ2</td><td>£7.30</td></tr></table>
  • <B>Terms and conditions settlements</b>
  • The National Joint Council for the Engineering Construction Industry has confirmed the terms of a new two-year terms and conditions settlement under the National Agreement for the Engineering Construction Industry. The agreement covers construction engineering workers employed in steelwork erection and steel bridge construction as well as process plant installations.
  • The revised terms and conditions for 2002/03 became effective on 1 April 2002.
  • The agreement encompasses various structural changes under which basic pay rates for craftsmen employed on general engineering and construction work rose by 11% and rates for craftsmen employed on major projects rose by 24%.
  • <B>National Insurance</b>
  • For the tax year starting on 6 April 2002, employers' National Insurance contributions were reduced from 11.9% on earnings to 11.8%. This was announced as a measure to balance the income from the aggregates levy in order to make the levy revenue-neutral.
  • Theoretically, this affects Prime Cost of Labour Dayworks calculations: in most cases the Prime Cost hourly rate will have reduced by 1p as a result.
  • Employees' NI rates remained unchanged at 10%. Class 2 and Class 4 rates for self-employed remained unchanged at £2 a week and 7% respectively.
  • Employers', employees' and self-employed NI rates will increase by 1% in April next year following the chancellor's April Budget.

Price Adjustment Formulae Indices

Price Adjustment Formulae Indices were designed for the calculation of increased costs on fluctuating or variation of price contracts. Indices are published monthly by the Stationery Office in Price Adjustment Formulae for Construction Contracts: Monthly Bulletin of Indices. They also provide useful guidance on cost changes in various trades and industry sectors and on the differential movement of work sections in Spon’s Price Books.

Related files/tables