Cost update Q3 2018

01 / Key changes

Percentage change year-on-year (Q3 2017 to Q3 2018)

	%	Direction
Building cost index	+5.0	▲
Mechanical cost index	+4.1	▲
Electrical cost index	+3.6	▲
Consumer prices index	+2.4	▲

(Q3 2018 figures are provisional)

Building cost index

A composite measure of building costs increased by 5.0% over the previous 12 months. Both labour and materials costs pushed higher, which maintains inflationary pressures for input costs. The prolonged weakness in sterling against the euro and the dollar has propelled the cost of imported materials and components, particularly with dollar-priced commodities. General underlying construction industry demand also supports the cost trends.

Mechanical cost index

The mechanical cost index rose 4.1% in the year to Q3 2018 – a marginal fall from 4.4% in Q2 2018. The labour and materials index components rose further over the year, but these inflationary pressures are easing slightly.

Electrical cost index

Aecom’s electrical cost index increased by 3.6% over the year to Q3 2018. Global metals commodity price rises are beginning to fade, but this has not yet fed through into the index’s latest readings because of the lagged effect as higher costs work their way through the whole supply chain.

Consumer prices index

Consumer price inflation moved down towards its target of 2% when it posted 2.4% annual change in September. Fuel costs rose while recreational and leisure components of the index slowed or fell from previous levels.

The following chart shows Aecom’s index series since 2005, reflecting cost movements in different construction sectors 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, Energy and Industrial Strategy), 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 – 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 4.3% on a yearly basis. The six highest increases were recorded in the following categories:

Price adjustment formulae

Sept 2017 – Sept 2018	% change
Metal: decking	8.8
Softwood carcassing and structural members	7.6
Windows and doors: softwood	7.6
Cladding and covering: coated steel	7.5
Windows and doors: steel	7.5
Waterproofing: asphalt	6.7

No single category recorded a yearly decline; the lowest yearly increases were observed in the following categories:

Sept 2017 – Sept 2018	% change
Concrete: in-situ	0.0
Pipes and accessories: copper	0.7
Cladding and covering: copper	1.3
Glazing	1.5
Finishes: flexible tiles and sheet coverings	2.1
Stonework	2.2
Pipes and accessories: clay and concrete	2.2

Materials 

03 / summary

• Consumer price inflation increased by 2.4% in September 2018 compared with the same month a year earlier ▲
• Manufacturing input prices rose 10.3% in the year to September ▲
• Factory gate prices (output prices) increased by 3.1% in the year to September 2018 ▲
• Commodity prices rallied in Q3 2018 after sliding through much of 2018 ▲
• Construction materials prices continued to increase on an annual basis in Q3 2018 with strong underlying demand ▲

04 / Key Indicators 

Construction industry

The BEIS All-work materials price index increased by 5.4% in the 12 months to September 2018. Housing-related materials increased by 5.0% over the same period; non-housing prices rose by 5.3% annually. All M&E categories continue to post significant yearly increases.

Construction materials	% change Sept 2017 – Sept 2018*
New housing	5.0	▲
Non-housing new work	5.3	▲
Repair and maintenance	6.2	▲

Mechanical services materials	% change Sept 2017 – Sept 2018*
Housing only	1.7	▲
Non-housing	2.9	▲
Electrical services materials	3.5	▲

Materials showing largest cost movement	% change Sept 2017 – Sept 2018*
Imported plywood	22.0
Fabricated structural steel	9.4
Plastic pipes and fittings (rigid)	7.4
Insulating materials (thermal or acoustic)	7.3
Paint (aqueous)	7.1
Paint (non-aqueous)	6.0
Builders woodwork	5.8
Metal doors and windows	4.9
Plastic pipes and fittings (flexible)	4.3

Data source: BEIS. *provisional

UK economy

Consumer prices	% change Sept 2017 – Sept 2018
Consumer Prices Index (CPI)	2.4	▶
Consumer Prices Index (CPIH)	2.2	▶

Consumer price inflation including owner occupiers’ housing costs was 2.2% in the 12 months to September 2018. The headline rate of inflation was 2.4% over the same period, marking a reversal after the spike of 2.7% in August. Many household, recreation and food items recorded slower rates of change.

Industry input costs	% change Sept 2017 – Sept 2018
Materials and fuels purchased by manufacturing industry	10.3	▲
Materials and fuels purchased by manufacturing industry excluding food, beverages, tobacco and petroleum industries	5.4	▲

Source: ONS

Input costs increased by 10.3% on a yearly basis up to September 2018. This reflects a pick up in the rate of change on a monthly and yearly basis. The yearly rate of inflation has remained positive since the middle of 2016. Crude oil was the largest single contributor to the 12-month change, up by 38% over the period, although this is a slower rate than the 41% posted in August.

Industry output prices	% change Sept 2017 – Sept 2018
Output prices of manufactured products	3.1	▲
Output prices of manufactured products excluding food, beverages, tobacco and petroleum	2.4	▲

Source: ONS

Factory gate prices increased by 3.1% on a yearly basis to September. Similar to input prices, output price inflation has remained positive since July 2016. Again, the largest upward contribution to the annual rate was from petroleum products, which increased by 13.5% on the year to September 2018. 

This 12-month rate of change is below the corresponding trend for input costs and will be causing commercial pressures across UK supply chains, as selling prices do not keep pace with input cost inflation.

Metal prices

	% change Oct 2017 – Oct 2018
Aluminium	-36.1	▲
Copper	-8.6	▲
Lead	-20.8	▲
Zinc	-18.4	▲
Nickel	8.8	▲

Source: LME

Commodity prices rallied a little during Q3 2018 but most are still some way off their 52-week highs. Commodities have been buffeted by a slew of global issues through 2018: a stronger dollar, rising US interest rates, weaker economic data for China and increasing tension in global trade relations generally. Many commodities are priced in dollars, which affects global demand due to the comparatively higher price. Higher US interest rates push up storage costs for commodities too, while trade tensions and tariffs have conspired to crimp global demand.

Exchange rates

	Sept 2017 average	Sept 2018 average	% change
GBP / EUR	1.1186	1.1195	0.1
GBP / USD	1.3324	1.3062	-2.0

Sterling gained some ground against the US dollar and the euro during Q3 2018. Market reactions to Brexit-related news often cause some initial movement in sterling. Nevertheless, broader trends have played out for sterling which reflect the UK’s comparative economic conditions against these two major currency pairs. Some of the Q3 rally against the euro was down to the prospect of some form of Brexit deal, but this was quickly unwound as the proposed deal seemed unlikely to be accepted. Against the US dollar, sterling fared less well in Q3, primarily due to US interest rates making successive increases, and this resulting in the US dollar being on the whole a more attractive currency holding. Irrespective of the currency pairing, sterling will see ongoing volatility into 2019. 

Labour

05 / Labour market statistics

• Average weekly earnings (total pay including bonuses) in construction rose to £623 in August 2018, from £612 a month earlier. Annually, total earnings increased 4.4% to August on a single-month basis. Regular pay (excluding bonuses and arrears) rose marginally to £593 per week in August, from £591 in July.
• Construction industry regular pay rates continued to rise above earnings changes for the UK economy in Q3 2018. The “whole economy” measure has recorded an at or around 3% year-on-year change through 2018, but construction regular pay has averaged nearer 5% over the same period.
• Real average weekly earnings for the whole economy show a small increase of 0.7% for the three-month average to August 2018 versus the same period in 2017.