Capital costs hurdle

Winning the Olympic bid will clearly be a major boon for the construction industry given the massive investment needed to get the 2012 event off the ground, but concerns are already growing over its possible inflationary impact on the sector as a whole in London and the South East. The decision by the International Olympic Committee on the venue for the Games in just over two weeks could have significant influence over the state of labour/tender/material prices, according to some experts. “It will have a major impact,” a cost expert at one top 10 QS firm reckons. “I can see it making percentage point differences to tender prices.”

The cost expert cites the impact of a current major scheme on site, the £450m Wembley stadium. The expert’s firm is overseeing several tenders for work in neighbouring North London and has noticed a pattern. “We are seeing an increase in prelims, overhead and profits put down by contractors on the jobs,” he says. “Normally they are 17% of the job, but in this case they are well over 20%. I think the contractors are allowing for extra labour costs because of the local demand. I can see the Olympics having a similar influence on the local market.” So as the cost expert warns, will the work needed for London 2012, which has been estimated at in excess of £8bn (see box), lead to an overheated construction market?

The answer is, as yet, unclear, due to the difficulty of predicting future workload for both the private and public sectors. Davis Langdon partner Simon Rawlinson, whose firm did some initial work with the Department of Culture Media and Sport on how the Olympics could affect the market, admits predicting demand and supply is a tricky job. “It’s very difficult to try and put your finger on these things,” he says. Rawlinson does point to the large percentage of the work being infrastructure as opposed to new build (around 85% of the overall work) as having less of an inflationary impact on market conditions. “There have been cost overruns on large infrastructure projects but besides that, there doesn’t appear to be excessive pressures on costs.” Ian Metcalf, director at Faithful & Gould, agrees. “There was a lot of talk about infrastructure costs such as for rail going up after the West Coast mainline, but it hasn't happened.” Rawlinson also points to major projects such as Terminal 5, the Channel Tunnel Rail Link and Wembley that are all currently being built, and not significantly overheating the market, as proof that fears over an Olympic effect could be overstated.

The team working on the bid itself have also expressed confidence in London and the South East’s capacity for the workload, which will need 5,000 workers on site at the busiest time of construction. James Bulley, London 2012’s director of infrastructure, told QS News’ sister magazine Building in April that fears over a struggle to get the work done were unfounded. “The capacity of the construction industry in London is, in fact, greater than that of most previous host cities.” The bid team stressed they have been working closely with government body the Office of Government Commerce to assess future capacity needs.

The nightmare situation is that all markets will be on the up, creating a huge wave of construction

Simon Rawlinson, Davis Langdon

Davis Langdon’s Rawlinson points to variables such as the state of the commercial sector, which has been quiet in the past few years, and whether government will stick to its spending commitments. “The nightmare situation is that all those markets will be on the up, creating a huge wave of construction.” Yet Rawlinson’s current analysis is that the so-called Olympic effect will add between one and two percentage points to cost inflation when the lion’s share of the work starts in 2008, which is not insignificant but, Rawlinson points out, is offset somewhat by his firm’s expectation that the demand for public sector construction will ease at around the same time.

Other experts are also less distressed at the possible impact. Joe Martin, director at RICS cost arm the BCIS, reckons the industry should be capable of withstanding the jump in workload. “It’s big money but the construction industry is full of big money. It doesn’t fill me with alarm, but it will keep the pressure on.” And equally positive is Reuel Abrams, associate at EC Harris, who has been working on the infrastructure needed for the Olympics and believes the work will allow the industry to plan ahead. “It will be a catalyst for investment in training which the industry needs to fill the skills gap,” he says. “I can't really see the downside to this.”