Cost update: May 2009

01 / key changes

• Building, mechanical and electrical cost indices saw substantial increases over the last year (though tender prices have fallen)
• Most inflation measures peaked around July last year
• Many inflation trends bottomed out at the end of 2008
• Consumer prices continue to rise but the year-on-year percentage change is expected to drop well below target before the end of the year
• Retail price inflation at lowest level since records began
• Falling fuel prices ease industry’s input costs
• Construction materials prices in decline for the last five months
• Very different inflation trends between M&E services materials
• Builders’ wage rates frozen

Building cost index The annual increase still leads the table as builders secured the biggest wage award last year.

Mechanical cost index Materials prices fell in the first four months of this year, particularly for steel components. The annual rate of increase is expected to fall sharply over the next two quarters.

Electrical cost index Electricians’ wage rates rose at the beginning of the year but materials prices have been in decline for the last six months, in large part because of the decline in copper prices.

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/premiums. In the current market, many costs as recorded here are rising but prices charged to clients are falling. Market conditions are recorded in Davis Langdon’s quarterly Market Forecast (last published 1 May).

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 fluctuation or variation of price contracts.

Over the 12 months between April 2008 and April 2009, the 60 Building Work categories have recorded an average rise of 3.2%, less than half that recorded six months ago. Since July 2008, when the building wage award came into effect, the work categories have seen an average fall of 1.4% as materials prices have declined.

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

July also saw the peak of oil prices above $140 a barrel before plummeting below $40 by the end of the year. Prices were steady between $40 and $50 a barrel in January and February, increased into the $50s in March and April and edged to $60 in mid-May. However, the drop in oil prices last year led to falling asphalt prices and saw the cost of operating plant slide: plant costs fell 12.4% between July last year and April this year.

A January wage increase for plumbers influenced rising costs but plastic and cast iron pipe prices increased greatly at the end of last year and clay and concrete pipe prices rose sharply at the beginning of this year.

Materials Industry output prices may be up, but everything else is still on its way down

03 / executive summary

• Consumer price inflation heads towards target
• Retail price inflation at lowest level since records began in 1948
• Industry’s input costs benefit from lower gas and electricity prices Industry output prices edge upwards after bottoming last December
• Construction materials prices falling since last October
• Mechanical services materials much higher than a year ago
• Last year’s collapse in oil prices makes plant costs cheaper

04 / key indicators

The year on year increase in CPI decreased to 2.3% in April but the index rose in February, March and April, the largest contributor to which was the higher price of petrol and oil. The annual percentage change in the Retail Prices Index dropped to -1.2%, the lowest figure since records began in 1948, due principally to the change in mortgage interest payments.

The percentage change in industry’s input turned negative in March and is now 5% lower than a year ago. However, input costs bottomed last December and are now 2% up. The principal reason behind this pattern of movement is the collapse, then small recovery in oil prices.

Excluding the food, beverages, tobacco and petroleum (fbt&p) industries, the rate of increase has also continued to fall but remains positive at 3.3% higher over the previous year. The index has been relatively static over the last nine months but dropped 1.5% in April, principally in response to a sharp drop in gas and electricity costs.

Year on year output price figures are likely to continue to fall over the next three months because of sharply rising prices last year. But the index rose in April, reflecting a rise in prices of petroleum products. Higher transport prices also helped the index excluding fbt&p edge upwards. Over the last year the following price changes occurred:

The price of recovered secondary raw materials (largely scrap metals) collapsed in the second half of last year but have been relatively stable in the first months of 2009.

Construction industry

Materials price increases for the construction industry over the last year are detailed below:

Overall construction materials prices rose by 3.4% over the year to March, sharply down from trends last year and the lowest figure for almost three years.

In March this year, mechanical services materials prices for housing were more than 8% higher than last year, though prices were fairly flat over the last six months. Prices for non-housing work started to fall at the turn of the year. In contrast, prices for electrical materials are now at the same level as a year ago, having fallen by 5% since September, as the collapse in copper prices in the second half of 2008 fed into the cost of components and cabling. Significant price changes recorded by official sources over the last year include:

Labour 

While some wage rates are frozen, others will benefit from regional increase agreements

05 / executive summary

• 2009 has so far seen increases of 4.5% for electricians, 5% for plumbers and 6.6% for steel erectors
• Building and civil engineering operatives’ rates have been frozen
• Over the first three months of 2009, average earnings in construction were just 0.7% higher than a year before

Building operatives

The three-year wage agreement for building operatives under the Construction Industry Joint Council (CIJC) expires at the end of June this year. Pay rates this year may be frozen, as has happened with Building and Allied Trades Joint Industrial Council (BATJIC) rates (see below). The principal CIJC rates since 30 June 2008 are:

Operatives working for generally smaller companies within the Federation of Master Builders expected a pay rise on 15 June under the BATJIC agreement. However, rates have been frozen at 9 June 2008 levels for the next 12 months. Rates will remain at:

Plumbers

Plumbers in Scotland and Northern Ireland will see their basic pay rates increase by 4.6% on 1 June to:

Plumbers in England and Wales received an increase in basic wage rates worth 5% from 5 January 2009.