Contractors’ profits under threat from price slowdown

Construction margins in London are under threat from a predicted fall in tender price inflation during 2008.

The latest tender price indicator from Gardiner & Theobald (G&T) predicts that price rises will peak this year and slow next as construction demand eases, public spending tightens and the global credit squeeze curbs investment.

G&T added that there was likely to be a ripple effect from London out to the rest of the UK.

The report warns that £29bn of PFI projects not currently accounted for will be forced back onto the government’s books after international reporting standards are adopted in April 2008.

This could affect government investment in public infrastructure projects. The government is committed to controlling public sector spending, but with PFI schemes coming back on to its books, and slower growth, it runs the risk of breaking its “sustainable investment rule”, whereby the UK’s public sector net debt must not exceed 40% of GDP. Net debt is running at 38.3% of GDP.

Gavin Murgatroyd, The report’s joint author, said: “We are already seeing signs that groundworks prices have dropped 0.5% for work starting next year. Last year, London prices increased 6.5%. This year, we are expecting an increase of about 5-5.5%. The trend is for much slower growth as work slackens off.”

Although construction prices have increased in recent years, contractors have reported improved margins as demand has outstripped supply.

Murgatroyd said: “A number of large commercial projects such as the Shard have stalled or been cancelled in London because rental prices cannot keep pace with increased build costs. That correction is likely to be exacerbated by the global credit squeeze, the impact of which will be felt more next year.”