September 20, 2004—Construction tender prices are forecast to rise well above general inflation rates and faster than commercial rental values, according to consultants EC Harris.
Huge increases in the price of structural steelwork and reinforcement during the first half of 2004 caused a shock rise in tender prices, the firm says. These are now forecast to rise by 4.8% nationally in the year to 2nd quarter 2005, while in London, tenders are forecast to increase by 6.0%.
The difficulties in the supply of steelwork are expected to add 2% to contractors costs for building works during the first half of this year, and there is every reason to expect that this will be passed on to clients in the form of higher tender prices. In addition to the increase in input costs, worries about the supply of steel are forcing contractors to make judgements on risk and these assessments are also adding to tender price rises.
The construction market remains very busy although the figures show a shift of emphasis towards the private residential market and public sector health, education and housing, EC Harris notes. These public sectors should substantially benefit from government pledges of a 35% increase in public spending in real terms over the next 2-3 years; health spending is set to rise by 5bn and education by 22 – 25bn, while housing is set to increase by 15 – 20bn, to meet the governments Decent Homes Standards.
Commenting on the figures Paul Moore, head of cost research at EC Harris, said: “Demand for contractors services, has been driven by a buoyant economy, low interest rates and government initiatives and reports from around the country indicate that most major contractors have very good orders books, generally underpinned by a number of large capital projects. Recent tender results indicate that due to the volume of workload and a general shortage of capacity in the market, contractors are becoming more selective in the choice of projects and clients which they wish to win. The consequence has been that tenders are not as keenly priced as has previously been the case. Contractors are looking for more bespoke contract arrangements through negotiation rather than the more traditional tender arrangements and clients are having to be more receptive and flexible in their approach to engaging a contractor.”
Moore added: “With this changing market there are also signs that contractors are becoming more focused on securing repeat business from selected clients and are more interested in partnering/framework opportunities. What is apparent is that with unit costs of construction rising, alternative procurement which involves rationalization and incentivisation of the supply chain will improve productivity, eliminate waste and add substantially to the value of the product.”
—Elliott Chase
Reprinted with permission; copyright 2004 i-FM
