Cost update: September 2007

01 Key trends

All the measures display lower figures than recently reported. The building cost index is down from last year’s 7.5%, but is higher than the others and has been at about the current figure for the past three quarters. This is largely down to materials prices, which continue to rise quickly (right). Materials inflation is expected to slow over the rest of 2007, bringing the index down to below 5% by the year-end.

The figures for the mechanical and electrical indices have come down, particularly mechanical, which stood at 7.1% three quarters ago. This is largely the result of the easing of materials price rises since the latter half of last year. With a relatively low increase in heating and ventilation wage rates of 3.5% from the beginning of this week, the mechanical cost index may remain the lowest of the construction measures for some time to come.

The consumer prices index has fallen steadily since breaking the 3% barrier in March and in July dropped below 2%.

Guide to data

Davis Langdon’s 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 government index series. They provide an underlying indication of price changes and differential movements in the various work sectors, but do not reflect changes in market conditions affecting profit and overheads provisions, site wage rates, bonuses or materials price discounts and premiums. Market conditions are discussed in Davis Langdon’s quarterly Market forecast (last published 27 July).

02 Price adjustment formulae for construction

Over the year from July 2006 to July 2007, the 60 work categories have recorded an average rise of 5.3%, down 0.5 percentage points from three months ago. The cost of building labour rose 4.2% and plumbing labour rose 3.3%.

The clear leader was leadwork. Lead prices doubled between June 2006 and February 2007 and rose a further 75% before peaking at just below $3,500 (£1,745) a tonne at the end of July. China has been leading demand, generating a supply deficit and low stocks.

Steel prices rose again in the first half of 2007, causing double-digit inflation in steel piling and reinforcement. Fabricated structural steel prices also rose (below). Steel prices may have peaked and could drift until the end of the year.

Timber work, such as doors, windows, fencing and carcassing, also rose by double digits, in response to the sharp increase in timber prices over this period, caused by demand from the Far East and Middle East.

Aluminium prices have fallen nearly 10% since the turn of the year but copper prices have been more volatile: prices fell 30% in the six months to February before staging a full recovery in three months. The latest trend is down, following uncertainty in world markets.

Materials

While the consumer price index dropped, construction materials prices rose over the past 12 months, with timber prices up by 30% and steel up between 20-30%

03 Executive summary

04 Key indicators

Labour

Builders’ wages rise 4.3%, while rates for heating and ventilation workers are up 3.5%

05 Executive summary

• Builders’ wage rates increased by 4.3% at the end of June.
• Heating and ventilation operatives’ rates rose 3.5% on 3 September.
• No further wage increases are due this year
• Average earnings in construction rose by 2.6% over the year to June, according to Office for National Statistics data.
• Minimum wage rises from £5.35 to £5.52 an hour from 1 October

Heating and ventilation operatives

Wage rates for heating and ventilation operatives increased on 3 September as the second part of a three-year wage agreement. Rates rose by 3.5%, the same as last November.

Responsibility allowances for craftsmen and senior craftsmen rose by a similar percentage, lifting the rate for one unit (second welding skill or supervisory responsibility) to 48p per hour and two units (second welding skill and supervisory responsibility) to 96p per hour.

Overtime and travelling allowances increased the same amount.

Abnormal conditions money has not changed and remains at £2.99 per day. Combined weekly holiday credit and welfare contributions will increase from 1 October 2007 by approximately 2.5%.

Dayworks

A new definition of “prime cost of daywork carried out under a building contract” was operative from 1 September 2007, superseding the previous definition in a December 1975 document. While not changing the definition of prime cost, the document provides two options for determining the value of labour used in dayworks:

• Option A: as the original definition, that is, a percentage addition to be tendered by the contractor for “incidental costs, overheads and profit” to the cost of labour, determined to reflect the cost of labour in accordance with the national working rule agreement and statutory on-costs paid by an employer.

• Option B: all-inclusive rates tendered by the contractor to reflect prime cost and allowances for required “incidental costs, overheads and profit”. Rates are normally fixed for the duration of the contract.