Cost update: November 2004

Executive summary
Over the past 12 months, all of the cost measures of inflation associated with the sectors of the construction industry have risen by at least four times the level of inflation measured by the Consumer Prices Index. Materials prices and labour costs have been rising at a much faster rate than in almost any other industry sector.

Of the five separate measures monitored, costs in the electrical sector have risen the fastest over the last year, as electricians received an 8.2% increase in basic wages at the beginning of the year. Electricians next year have agreed one of the lowest wage awards, which should place electrical costs at the bottom of the ranking.

The mechanical index has risen 20% in the four years since 2000, slightly less than the other construction measures, which have generally increased 24-25%. Mechanical materials price rises have been restrained until recently and wage awards for heating and ventilating operatives have been slightly more muted than other trades over the past couple of years. Over the same period the Consumer Prices Index has risen 5%.

Key trends
? Construction costs have risen four times faster than consumer price inflation over the past year
? Electrical costs have shown the biggest increase – rising 8.1%
? Labour costs and steel and metal prices underpin the rises

The rate of increase in construction costs has exceeded consumer inflation measures for the seventh consecutive year. Wage settlements in the industry continue to outstrip most other industries and the worldwide hike in steel and metal prices continues to affect many materials used in construction.

Guide to data
Davis Langdon’s series of 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 the government’s index series. They provide an underlying indication of price changes and differential movements in the work sectors but do not reflect changes in market conditions affecting profit and overheads provisions, site wage rates, bonuses or materials’ price discounts or premiums.

The above graph shows how Davis Langdon’s index series, reflecting cost movements in different sectors of the construction industry, have fared over the past four years, with the movement of the Consumer Prices Index for comparison.

Market conditions are recorded in Davis Langdon’s quarterly market forecast (last published 5 November).

Materials

Massive hikes in the price of steel and other metals continue to cause problems, and energy rises are adding to the industry’s input costs

Key trends
? Consumer prices – CPI annual increase falls to 1.2% but the trend is beginning to rise
? Input costs to industry soar to 8.4%
? Industry output figures highest since December 1995
? Metals prices reach new highs
? Non-housing building materials have risen by 9.8%
? Costs to industry in general are rising faster than for a number of years, fuelled largely by high oil prices.
? Construction has been hit by the unprecedented rise in steel prices and the continually climbing prices of non-ferrous metals.

Key indicators
Input prices have risen 6.9% in the four months since June. The annualised figure of 8.4% represents the industry’s highest level of input inflation since the end of 2000. Then, as now, the reason was oil prices. Crude oil prices have risen nearly 53% over the year to October and account for 6.4 percentage points of the 8.4% headline figure, although oil prices have now fallen considerably since their October peak. Materials and fuels purchased by industries other than food, beverages, tobacco and petroleum have risen 3.9% over the year, mostly in the past three months.

As well as crude oil, industry has been faced with hefty increases in fuel and imported metal costs. The price of imported non-ferrous metals has risen by 17.6% over the past year, which brings them to the level reached in mid-2001. The price of imported iron and steel has risen by 33.7% over the past year and remains some 30% higher than when it last peaked in the autumn of 2000.

Output prices have been rising steadily since the end of 2001. Output prices for all manufactured products have now reached an annual inflation figure of 3.5%, the highest recorded since December 1995. Petroleum products inevitably form the group with the highest output prices but manufacturing products other than food, beverages, tobacco and petroleum show a rise of 2.9% in prices over the last year – itself the highest annual figure since March 1996.

Metal products lead the way as the product group with the highest output prices. In the base metals sector output prices have risen by 20.8% over the past year but ONS figures show that “recovered secondary raw materials” have increased by 56.4% over the year, including 28% since June. This consists mainly of scrap metal, which constitutes the primary ingredient for reinforcing steel.

Construction materials
Base metal prices rose steeply earlier in the year. This rise has slowed in the past three months, but the figures hide a period of considerable volatility. Base metal prices started to rise steeply in spring 2003 when world demand, particularly from China, began to bite. Prices peaked in February or March this year after virtually doubling, and have since experienced a rollercoaster-like ride.

After falling 25% between a peak in March and a trough in April, lead prices steadily climbed back before once again suffering a 14% fall in three days in mid-October. Since the end of October, prices have rallied again and now stand at a new high – cash prices have passed the $1000-a-tonne mark for the first time since 1979 and are more than double its price of 19 months ago.

Most of the metal prices have rallied strongly since the end of October and copper prices have reached new highs: cash prices are just short of $3200 a tonne but futures prices are considerably lower as extra supplies are set to become available.

The figures show construction materials prices rising at record pace, with the rate of increase slowing for building materials but increasing for mechanical and electrical items.

The highest rate, for non-housing building materials, reflects the continuing increase in steel prices that began at the beginning of the year and has impacted most on commercial and industrial buildings, whether built from structural steelwork or reinforced concrete.

The Office for National Statistics identifies the following key materials price changes over the past year (see relevant table).

Labour

Wages for construction workers are rising – particularly in Scotland and Wales. Here are the key agreements, the main trends and a closer look at plumbers and electricians

Key trends
? Construction pay settlements in 2004 were approximately twice the average rate of the rest of the economy
? The site rate rises have been higher that average in Scotland and Wales and lower in the South-east and East Anglia
? 2005 wage agreements are now in place for all major operative groups
? Plumbers and electricians’ rates rise at the beginning of January
? Pay settlements in the industry in 2004 ranged between 4.5% and 8.2%, averaging twice the 3.2% pay settlement across the economy. However changes to site rates, including bonuses and self-employed figures, have varied depending on market conditions. Industry pay settlements for 2005 have been set at between 3.3% and 9.5%

Plumbers and electricians

Plumbers
In September 2003 the Joint Industry Board for Plumbing Mechanical Engineering Services in England and Wales determined a two-year pay agreement that fixed plumbers’ wage rates until January 2006. The first part of the deal came into effect on 5 January 2004, lifting basic hourly rates of pay by 6%. The second part of the deal comes into effect on 3 January 2005 at which time basic hourly rates for operatives, apprentices and trainees will rise another 6%. The revised rates for the principal grades of operative (see relevant table).

Daily travel time allowances will also rise from 3 January 2005 but only by an average of 2.9%. Other allowances, such as responsibility/incentive pay allowances, mileage allowance, plumbers’ welding supplement, subsistence allowance and lodging allowance, will remain unchanged.

Wage rates for plumbers in Scotland and Northern Ireland remain unchanged until 30 May 2005, when rates will increase by between 5% and 6.6%

Daywork rates
The following are prime cost figures for dayworks purposes calculated in accordance with the Definition of Prime Cost of Dayworks Carried Out Under a Building Contract, published by the RICS, in respect of plumbing operatives both now and in respect of the rates which will come into force on 3 January. (see relevant table)

These rates have been in force since 23 August 2004 when holiday and welfare stamps increased.

It should be noted that these rates represent only the most basic requirement. Extra payments or differentials in respect to skill, responsibility or risk (where applicable) may legitimately be added to the base rates shown.

The prime cost figures above are subject to contractors’ percentage adjustments to cover incidental costs, overheads and profit, which will depend on location, labour availability and market conditions.

Electricians
Electricians’ wage rates will rise on 10 January as the first tranche of a three-year deal. National standard rates and rates in Scotland will rise 3.7%, but rates in London will vary depending on grade by 3.3% to 6.2%. This is the lowest annual increase for electricians for 8 years. Full details in the next Cost Update.