Larger contractors benefit from less competition for the bigger projects and the longer timeframes involved means that work will carry them through into 2009. There is little evidence of increased competition or sharper pricing at the top end of the market and buying some trades on budget remains a problem at present. In addition, larger projects have generally been more exposed to rising commodity costs and exchange-rate-driven inflation over the last year and, as a result, suffered higher inflation levels.
In contrast there is increasing competition on the smaller projects forcing contractors to lower their overheads and profit provision and to accept more varied procurement types, such as single-stage tendering. With a continuing industry decline and more smaller and medium sized contractors looking for work, cut-throat market conditions could soon ensue. Over the coming year contractors of all sizes will be hungrier for more work but are also likely to face higher wages and increased material costs.
Central London skylines continue to be dominated by cranes and several large schemes have just recently got underway, creating a cushion of activity for major contractors and subcontractors. London contractors will also be kept busy by the Olympics and infrastructure projects coinciding with the decline of private sector commercial projects. However, other cities will not be so fortunate.
Inflation over the next two years should reduce for most construction work. London prices are expected to rise by 3 to 5% per annum with activity being maintained by the Olympics and infrastructure work. Outside of London, falling demand and increased competition for work will lead to lower price rises and inflation as low as 2-3% or possibly even a negative figure some time over the next 24 months.
Peter Fordham, author of the report said, “If the slowdown in Western economies helps to cool commodity prices and labour rates drop in a chase for work, we could see construction prices coming down”
The Construction Industry Joint Council has recently raised the minimum basic wage of directly employed operatives by 6% and small and medium-sized builders raised their wages by 3.5% to 4.5% in line with the BATJIC agreement. The egress of Eastern European labourers back home due to more work and the weakening pound may begin to herald the return of labour shortages and resulting labour cost rises. On the other hand, the slowing housing sector has led to reduced wage demands from carpenters and bricklayers.
Materials prices rose by 3.6% in the first five months of 2008, dominated by steel price rises which, owing to global demand, have far exceeded other increases. Fabricated steel is up by 14%, reinforcement steel has risen by 19% and Corus have increased their prices for structural sections by £140 a tonne with more to come. The steep rises have led subcontractors to refuse to fix prices in contracts, leaving clients exposed to further hikes and being a particular risk for larger projects.
Whilst the price of oil may have peaked at $145 (£72) a barrel and now be in decline, gas and electricity prices showed no sign of their usual seasonal price fall after the winter.
