Cost update: Q2 2014

01/ Key changes

• Construction output recorded no change when measured on a quarterly basis - Q1 2014 vs Q2 2014. Year-on-year output grew by approximately 5%.
• New housing construction continues to be the primary reason for increases in new work output.
• Construction materials prices (recorded by the ‘All Work’ Construction Material Price Index published by BIS) rose by 0.5% in June.
• Materials imports increased at a faster rate than exports, widening the materials trade deficit.
• Consumer price inflation fell to 1.6% in July, from 1.9% in June.
• Construction average weekly earnings increase by 1.2% on a yearly basis but fall using a broader three-month average.

The chart below shows Aecom’s index series since 2000, reflecting cost movements in different sectors of the construction industry and consumer prices.

Percentage change year-on-year (Q2 2013 to Q2 2014)

Building cost index

Building costs increased in the year to Q2 2014 by 0.35%. The rate of change increased slightly from +0.20% in the first quarter of 2014.

Mechanical cost index

Despite a 0.32% increase year-on-year in the second quarter of 2014, the rate of annual change slowed again from +1.1 in the first quarter.

Electrical cost index

The electrical cost index increased by approximately 1% in Q2, broadly matching the yearly change seen in the two preceding quarters.

Consumer prices index

The annual consumer price inflation rate rose to 1.9% in June as a result of consumer spending on domestic goods and food. But the annual rate reversed these gains in July and fell back to 1.6%.

02 / Price adjustment formulae for construction contracts

Price Adjustment Formulae indices, compiled by the Building Cost Information Service (previously by the Department for Business Innovation & Skills), are designed for the calculation of increased costs on fluctuating or variation of price contracts. They provide useful guidance on cost changes in various trades and industry sectors - i.e. those including labour, plant and materials - and on the differential movement of work sections in Spon’s Price Books.

The 60 building work categories recorded an average increase of 1.5% on a yearly basis. Higher rates of change were seen in:

The largest price decreases include:

MATERIALS 

03 / Summary

• Consumer price inflation falls in July ▼
• Manufacturing input prices continue to fall markedly ▼
• Industry output prices remain just in positive territory ▲
• Metals prices make notable gains in Q2 ▲
• Construction materials price inflation picks up across sectors ▲

04 / Key indicators

Construction industry

The All Work material price index increased by 1.5% in the year to June 2014. Sector-specific demand continues to act as the spur for larger annual. Materials price increases for the construction industry over the last 12 months are detailed below:

Mechanical services materials for housing fell on an annual basis at -1.0%, but the rate of decline slowed in June 2014. Meanwhile non-housing and electrical services materials increased their rate of decline from the yearly change recorded in March’s cost update.

UK economy

The annual rate of consumer price inflation rose to 1.9% in June 2014, increasing notably from 1.4% in May. Consumer spending was the principal reason for the upward movement. However, the annual rate dropped to 1.6% in July.

Input price inflation decreased for the eighth consecutive month in June. On an annual basis, input prices fell by 4.4% on the broader measure. But core input inflation, which excludes volatile items, decreased at 3.5%, up marginally from the minus 3.9% drop recorded in May.

Factory gate prices rose just 0.2% in June, which is a slower rate of annual change than all preceding months in 2014. The narrower core index remained unchanged at 1.0% in June.

Source: ONS

Metal prices

With the exception of copper, metals prices climbed higher in Q2 2014. In particular, the significant rises in nickel, aluminium and zinc result from a combination of haven status investing, restocking and supply constraints. Copper prices, though, remain weaker as Chinese imports declined again and domestic production of refined copper increased.

Exchange rates

Sterling’s rise throughout 2014 continued in the second quarter. But a change of direction in July against the US dollar, in particular, was propelled further, in part, by Bank of England indications regarding future interest rate hikes.

LABOUR

Wage agreements

Construction Industry Joint Council

The parties to the Construction Industry Joint Council have agreed a new pay deal, which sees pay rates increase by 3% from 30 June 2014, and a further 3% rise from 29 June 2015. Travel and fare allowances also increase from 30 June 2014, along with subsistence allowances increasing to £35 a night from 6 January 2015. The agreement also addresses changes to sick pay.

Joint Council Committee of the Heating, Ventilating and Domestic Engineering Industry

A 2.5% increase in hourly wage rates comes into effect from 6 October 2014. Amendments to the basic working week also apply from the same date, as the number of hours per week reduces from 38 to 37.5. Changes to the level of weekly sickness and accident benefit are also planned.

The Joint Industry Board for the Electrical Contracting Industry

Members have received a 2%increase in hourly wage rates from 6th January 2014.

Building and Allied Trades Joint Industry Council

The Building and Allied Trades Joint Industrial Council (BATJIC) recently agreed a two-year pay deal effective from 30 June 2014. The deal involves variable wage rises for the standard wage rates averaging 2.5%. A further set of rises averaging 3% come into effect from 29 June 2015. Annual holiday entitlement will increase by one day, as of 29 June 2015, from 21 days to 22 days, making a total of 30 days including public holidays.

The new BATJIC rates of wages are: