Cost update Q3 2016

01 / Key changes

Percentage change year-on-year (Q3 2015 to Q3 2016)

(Q3 2016 figures are provisional)

Building cost index

A composite measure of building costs increased over the past 12 months by 2% at Q3 2016. Labour costs are still rising albeit at a slightly lower rate, and materials cost inflation is now increasing its contribution to the overall increase.

Mechanical cost index

The rate of annual change increased to 3.4% at Q3 2016 from 2.2% in the preceding quarter. Labour costs remain the primary driver of inflationary trends in this index with materials once again showing upward movement.

Aecom indices

Electrical cost index

The electrical cost index increased by 2.7% over the year. Rises in labour costs are still the main driver with materials showing early signs of increasing in more recent months.

Consumer prices index

Consumer price inflation picked up slightly in Q3 2016, recording 0.9% annual change. The rate was slightly lower in September 2016, but still remained higher than the rates otherwise seen since 2014.

The following chart shows AECOM’s index series since 2005, reflecting cost movements in different sectors of the construction industry and consumer prices.

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 guidance on cost changes in various trades and industry sectors and on the differential movement of work sections in Spon’s price books.

The 60 building work categories recorded an average increase of 2.8% on a yearly basis; 57 of the 60 categories showed an increase. Highest rises were recorded in the following categories:

Price adjustment formulae

Only two trades have shown a decrease for the period:

Price adjustment formulae

Materials

03 / Summary

• Consumer price inflation increased by 0.9% in October 2016 compared with the same month a year earlier ▲
• Manufacturing input prices increased 12.2% in the year to October 2016   ▲
• Factory gate prices (output prices) rose 2.1% in the year to October 2016   ▲
• Commodity prices have continued to post notable annual increases ▲
• Construction materials prices decreased slightly on a monthly basis in September but rose overall on an annual basis ▲

04 / Key Indicators

Construction industry

The All Work material price index increased by 1.3% in the year to September 2016, although the index decreased by 0.7% compared with August. Housing-related materials increased by 1.9% over the past 12 months. Non-housing materials prices also show a small increase over the year, increasing by 0.6%. All mechanical and electrical categories posted small annual increases.

Construction materials

*provisional

Note: the numbers in the table above do not include mechanical or electrical materials

*provisional

Materials showing the largest cost movement are:

*provisional

Data sources:  ONS and BEIS

UK economy

Consumer price inflation rose by 0.9% in October compared with 1% in September. Transport prices provided downward pressure during 2015 and early 2016 but have now become the largest upward pressure on inflation. Bank of England governor Mark Carney has stated recently that he is willing to see inflation overshoot to help keep the UK economy from stalling.

Source:  ONS

The total input price index increased 4.6% between September and October, the largest monthly increase since comparable records began to be collated by the ONS. The upward drivers to the index came from crude oil, other imported parts and equipment and metals.

Source:  ONS

Factory gate inflation rose 2.1% in the year to October 2016, compared with a rise of 1.3% in the year to September. This is the fourth consecutive increase following two years of falling prices and the largest increase since April 2012.

Metal prices

Source:  LME

Commodities price trends continue to show signs of life with a reversal of the long-established downward trend of the past two years. Apparent efforts to address production overcapacity with mine closures in a number of countries and production cuts have provided support to prices, along with some improvement in aggregate demand.

Exchange rates

The pound fell after the referendum, then stabilised before falling again in October on fears that the UK was heading for a hard Brexit. This month, the pound has been buoyed by some upbeat economic news and UK government announcements that it is targeting a soft Brexit.

The general movement in the pound in November has been upward, registering an advance against the dollar, climbing around 1.6% against the US currency in November. Sterling also gained against the Euro in November.

Labour

05 / Labour market statistics

• Average weekly earnings (total pay including bonuses) in construction rose to £615 in September 2016 from £605 a month earlier. Annually, total earnings increased 3.4% in September on a single-month basis, and 3.7% annually on a three-month average basis (values for the three months ending in September compared with the same period a year earlier). Regular pay (excluding bonuses and arrears) increased to £592 per week in September, with annual rates of 4.4% on a single-month basis and 3.6% using a three-month average.
• Construction industry regular and total pay continues to exceed changes to average earnings for the whole economy classification, which was 2.4% at September 2016.
• Real average weekly earnings for the whole economy increased by 2.7% (regular pay) in September 2016.

06 / Wage agreements

Construction Industry Joint Council

Following negotiations between the parties to CIJC, the council has agreed a two-year agreement on pay and other conditions. Hourly pay rates will increase by 2.5% from 25 July 2016 and then by a further 2.75% in June 2017. Industry sick pay and subsistence allowance will also increase in line with the basic pay rate increases. Workers will receive an extra day’s holiday from 1 January 2017, which is worth an additional 0.4%. For more details on apprentice rates, daily fare and travelling allowance and other rates, refer to CIJC document IR.2016.19.

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

A two-phase agreement has been agreed between BESA and Unite trade unions. Phase 1 includes 2.0% and 2.50% increases in the hourly wage rate effective from 3 October 2016 and 2 October 2017 respectively. Phase 2 covers the periods 2018-19 and 2019-20 involving increases in index and other benefits agreed in July 2016. 2018 and 2019 hourly wage rate discussions will take place towards the end of 2016. Introduction of calculating daily fare and travel allowances has been changed from kilometres to miles. Workers’ annual holiday entitlement is to increase from 23 to 24 days effective from February 2020. For more information on agreement, refer to JCC letter 117 of BESA.

The Joint Industry Board for the Electrical Contracting Industry

The electrical contracting industry has agreed a four-year wage deal, effective from January 2017. Hourly wage increases of 2% in 2017, 2.50% in 2018, 2.75% in 2019 and 3.0% in 2020. Introduction of a new mileage allowance and rate to replace travel allowance and travel time also comes into effect. Annual holidays increase to 23 days in 2019 and 24 days in 2020. For more information on the agreement, refer to the electricals’ and Unite wage agreement document – July 2016.

Building and Allied Trades Joint Industry Council

The Building and Allied Trades Joint Industrial Council (BATJIC) agreed a two-year pay deal effective from 27th June 2016. Workers will receive a 2.5% pay rise this year and a further 2.5% increase in 2017.

Lower paid operatives will get a bigger boost of 4% this year, followed by 2.5% next year. The agreement includes a commitment that, if inflation in early 2017 is higher than 2.5%, then the 2017 pay rise will match this up to a limit of 3%.

The Joint Industry Board for Plumbing, Mechanical Engineering Services in England and Wales

A 2.5% increase in hourly rates came into effect from 4 January 2016. Employee rates of pay, allowances entitlements and benefits are published in promulgation no 171 of JIB for Plumbing, Mechanical Engineering Services in England and Wales agreement.

The BATJIC rates of wages effective from 27 June 2016 are:

WAGE AGREEMENT SUMMARY

The following table summarises the wage agreements currently in force for the principal wage fixing bodies within the construction industry.