What does the coming year promise for the construction industry? Healthy order books, rising prices and labour shortages are likely to dominate 2006, according to Gleeds’ latest inflation report
NATIONALLY
Market conditions
The market remains strong and this continues to show in increases to both tender price and building cost inflation above the underlying general inflation rate.
This should continue over the next two years with particular growth anticipated in the public non-housing and commercial office sectors.
Infrastructure and regeneration projects are also expected to increase over the forecast period.
The PFI market remains strong with some 59 PFI deals worth £5bn expected to have reached financial close last year – mainly in the health sector and coming on stream for construction over the next few years.
Contractors are very selective over which schemes they tender for, both in terms of sector and clients. This is having a significant effect on preliminaries, overheads and profit margins.
Many hotspots exist in the UK and it remains to be seen what overall impact the Olympics will have on the country as a whole in relation to pulling labour and materials resources to London.
Labour
While the percentage of firms reporting difficulties in securing skilled labour dropped last year, there remains a general shortage of skilled labour around the country and throughout the industry, with bricklayers and carpenters remaining in demand in a number of areas.
This shortage continues to fuel wage increases in excess of general inflation – a situation likely to last over the forecast period.
Materials
Steel price increases eased last year following a large jump in prices in 2004.
This autumn’s increase of £20 per tonne from the mills and stockholders is the first since January 2005 and with world steel production up 6% last year and steel companies reporting good forward order books for this year, the overall increase in steelwork prices to end clients is expected to be around 5% for 2006, similar to that in 2005.
Following significant increases in cement prices last year, there could be further prices in key building materials such as cement and asphalt in the new year by as much as 10% to 20%, due to rising energy costs, EU legislation and transportation.
Midlands
The market remains buoyant with no apparent weak sectors other than a perceivable reduction in retail development reflecting the current slowing down of retail spending as a whole.
PFI work continues to come on stream and there appears to be an upsurge in regeneration projects in the area.
Contractors remain selective in the type of work they are willing to tender for and the procurement route being offered, with many contractors unwilling to go on tender lists for large design and build projects on a single stage basis.
A shortage of skilled labour remains a problem.
South west
The construction market in the South West is best described as steady with less of the peaks and troughs experienced in some other regions.
Likewise the lack of supply in the labour market does not appear to be as acute as some other parts of the country, although the shortage of bricklayers has resulted in attempts to “design out” brickwork details on some projects to overcome the problem.
The steadying of steel prices has been welcomed but the increases in fuel costs have had an overall affect on materials costs.
Just to buck the trend slightly, one contractor in the region was recently only too happy to tender on a single stage design and build basis and some quite competitive rates have been obtained in traditional Bills of Quantities, with contractors taking the view that there is less risk in tendering on this basis.
Scotland
The buoyant state of the market in Scotland is expected to continue over the next two years with a slowing down over the later years of the forecast period.
There are a number of £100m+ jobs coming on stream shortly and there is still plenty of activity in the education, commercial and retail sectors although the previously observed slowdown in the residential market continues.
PPP contracts continue to bring work into the region.
The general comment on procurement routes applies equally to Scotland with two stage design and build tenders being more acceptable than single stage and good old-fashioned Bills of Quantities being perfectly acceptable for the right contractor.
Skilled labour shortages continue.
North east
While there are signs of a slowing down in the market, other contractors are reporting full order books for this year.
Inflation predictions remain similar to those reported earlier in 2005.
Tender procurement routes are again going to be critical to obtaining competitive prices with many contractors being disinterested in tendering on a single stage design and build basis.
North
The market remains buoyant with increased activity in Liverpool in preparation for the European Capital of Culture celebrations in 2008, and work at the Royal Liverpool Hospital.
A number of large schools projects are also coming to fruition and increasing interest in the education sector but the slowdown in the residential market is also apparent in this region.
Labour remains in short supply across the board with some particular shortages experienced in the M&E trades in this area.
Contractors are selectively tendering for specific types of work in sectors they feel familiar with and use procurement routes that they fully understand, rather than going for all work in all sectors and on unfamiliar hybrid tendering procedures.
Difficulties have been experienced in obtaining concrete frame quotes as an alternative to steel design, which has achieved little in offsetting the steel price increases of last year.
London & south east
The success of the 2012 Olympic bid will be the major significant factor on the construction market over the forecast period with predictions of an added factor of 1% to 2 % above the pre-Olympic assessments in the region.
However, the exact timing of the commencement of the main construction projects will be vital and dependent on the finalisation and release of funding monies.
Infrastructure works are expected to increase over the next two years with the main Olympic construction works kicking in from 2008 onwards.
Some of the existing larger projects in the region are due for completion during the period, such as the Channel Tunnel Rail Link in 2007 and the first phase of Heathrow’s T5 in 2008.
The exact timing of the new Olympic projects coming on stream and the completion of the existing major projects will have a major impact on the supply for the labour market and trade unions are already citing the Games in their push for either national construction agreements for large projects or for a common rate to be adopted for the capital.
With the existing labour market still suffering skill shortages and with preliminaries, overhead and profit percentages on some recent jobs reported to be up to 20%, this will put further pressure on tender prices.
The significant increase in cement prices at the beginning of the year has now worked through into tender prices and with further increases in key material prices expected in the new year due to rising energy costs, fuel increases on transportation costs and EU legislation, materials prices are expected to remain ahead of general inflation during 2006.
Source
QS News
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