Cost update: November 2009

01 / Key changes

The building cost index shows year-on-year fall for first time in 40 years, and the mechanical cost index will follow suit next quarter.

• The trend of falling prices has generally been reversed.
• Consumer price inflation is heading back towards target.
• Industry input costs and output prices are beginning to rise.

The trend of falling construction materials prices has reversed.

Wages are frozen for builders, plumbers and heating and ventilating operatives.

Pipefitters and scaffolders were the highest construction earners last year.

(See table 1 below)

Building cost index - The year-on-year fall was the result of this year’s pay freeze combined with falling materials prices.

Mechanical cost index - This has declined for three consecutive quarters. Materials prices bottomed out in June but a wage freeze for heating and ventilating operatives will turn the year-on-year percentage change negative in the fourth quarter.

Electrical cost index - The year-on-year percentage change is its lowest since 1999 but, unlike the other indices, it has risen over the past three quarters.

(See graph below)

02 / Price adjustment formulae for construction

Price adjustment formulae indices, compiled by the business and innovation department, are designed for the calculation of increased costs on fluctuating or variation of price contracts. They provide useful guidance on cost changes in trades and industry sectors and on the differential movement of work sections in Spon’s Price Books.

Over the 12 months to November 2009, 26 of the 60 building work categories have recorded a fall in price of up to 19% and the average change of all 60 categories is a fall of 1%. However, over the past six months, the average change has been an increase of 1.3% with only 15 categories showing a price reduction, and then down only to 3.8%. Over the past year, the categories showing the greatest price falls were:

(See table 2a below)

The large price falls reflect the drop in steel prices that occurred in the first half of the period before they bottomed out and began to rise at the end of the summer.

Over the past six months, there have been more price increases than falls, with the largest being:

(See table 2b below)

These price changes reflect the rise in lead, timber and oil prices over the past six months as well as the recovery in rebar prices.

Materials

The industry’s costs and prices are showing signs of rising from last year’s nadir

03 / Executive summary

• Consumer price inflation below target but will jump in new year.
• Industry’s input costs have risen owing to higher fuel prices.
• Industry output prices show moderate rises.
• Construction materials prices rise after nine months of falling.
• Plant costs higher following increase in fuel costs.
• Steel prices have edged up, but recovery may have come to an end.

04 / Key indicators

(See table 4a below)

The annual rise in consumer prices fell from 5.2% in September 2008 to 1.1% a year later. The figure rose slightly in October and is now expected to continue to rise, accelerating sharply in the new year as the level of VAT returns to 17.5%. But by the end of 2010 the Bank of England expects inflation to fall back close to 1% as a result of the spare capacity in the economy.

(See table 4b below)

Industry’s input costs fell sharply during the second half of last year. In the first half of 2009, they were flat but they have started to rise in the past three months in response to the movement of oil prices.

The narrower index, excluding the food, beverages, tobacco and petroleum (FBT&P) industries, has been quite stable over the period with virtually no movement between June 2008 and March 2009. Costs then fell by 3%, reflecting a fall in fuel prices and lower prices for imported materials. This has been reversed over the past three months as gas and imported goods have become more expensive.

(See table 4c below)

The headline figure for output prices has started to move up only in the past six months, in response mainly to the rise in petroleum products. Output prices, excluding FBT&P, have shown steady but restrained growth over the year.

Over the last six months the following price changes have occurred:

(See table 4d below)

A degree of volatility has returned to the scrap metals market, where prices have risen 12% from their relatively stable level in the first half of the year.

(See table 4e below)

Overall construction materials prices declined by 3% over the year to September but have shown a rise of 0.7% over the last six months.

Price increases in the past six months in the sub-sectors shown above are all between 0.3% and 1.1% but the annual figures indicate a sharp disparity in the first six months of the period, when housing materials rose just 0.2% but non-housing materials fell 5.4%. This was owing largely to the collapse of steel prices that occurred in the latter half of 2008 and continued into the first half of 2009.

Construction materials prices generally fell for nine consecutive months between November 2008 and July 2009, dropping 5%, but reversed the trend in August and September, recovering 1.5%. Mechanical services materials prices have drifted downwards for most of 2009 (losing 3-4% during the year). Electrical services materials dropped 5% between September 2008 and April 2009 but have recovered, thanks in large part to the doubling of copper prices.

(See table 4f below)

Materials showing significant price shifts over the last six or 12 months are shown below:

(See table 4g below)

Labour

Pipe fitters were the top earners, but crane drivers suffered the biggest hit to their pay

05 / Executive summary

• Pipe fitters and scaffolders were the biggest earners last year.
• Crane drivers, steel erectors and rail operatives suffered the largest falls in pay packets.
• Wage rates have been frozen for building and civil engineering, plumbers and heating and ventilating operatives.
• Engineering construction workers and local government craft workers failed to agree to pay offers of 2% and 1% respectively.
• Electricians due to receive 5% wage increase in January.

Hours and earnings data

The Office for National Statistics has published the results from its 2009 Annual Survey of Hours and Earnings (ASHE). It showed that in the UK, median gross weekly earnings for full-time adult employees rose 2% on the previous year, when the same comparison showed a 4.6% rise. The ASHE data is based on a sample of employee PAYE records taken in April of each year.

The survey revealed that, based on a sample of 974,000 jobs, earnings in construction rose by just 0.7% between April 2008 and April 2009 with median gross earnings of £498 a week. Earnings of skilled construction and building trades fell 1.2% to £445 a week. The following table shows median gross weekly pay for construction occupations at April 2009 and the change over the year:

(See table 5a below)

The survey showed that skilled trades typically worked 40 hours a week, the same as the previous two years. Average overtime, however, fell from six hours a week to just over five. However, crane drivers’ week fell from 50 to 47.5 hours and steel erectors’ from 46 to 42.

(See table 5b below)