With contractors struggling to reach demand, cost consultants at Mace have upwardly revised their 2015 forecast for tender cost inflation.
Mace’s latest Tender Cost Update for the UK market forecasts nationwide tender cost inflation to be 4.5% this year, and 5.5% in London. Three months ago, it was forecasting 3.5% nationally and 4.5% for London. The one percentage point increase in each case comes as a result of the growing demand in most regions and improving contractor margins.
Not only are contractors’ costs rising, but they are also in a position to carve out some profit for themselves on top, at last, thanks to rising demand.
With both overheads and profit margins now increasing for main contractors and subcontractors, Mace has predicted that this combined effect, along with a further tightening of the market, will push tender prices up at above the level of general inflation.
Mace forecasts that steady inflation will increase tender prices nationally by 4% in 2016 and 2017 with prices in London also rising by 4% in 2016 but slowing to 3.5% in 2017.
However, Mace warns that while the industry comes to terms with this growing demand, the shortage of some skills that the industry is currently facing will remain.
Mace warns that there are also concerns about the effect that the slower European economy will have on the UK, and the uncertainty surrounding the impact of the Greek general election on the wider economic outlook.
The worldwide drop in oil prices, which has seen a decrease in levels of inflation, will also continue to have an impact. Although this is expected to continue through 2015, Mace predicts that the effect will eventually fall away while general inflation should remain subdued for the next two to three years at least.
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Mace director for cost consultancy Chris Goldthorpe said: “Having lived through six years of recession, contractors are now taking the opportunity to improve margins and continue to be selective in the projects they are willing to undertake. Projects that are complex or have specific difficulties to overcome need flexible procurement methods and skilled negotiation in order to achieve value for the client.”
The latest edition of Mace’s quarterly UK Tender Cost Update reports that the cost of construction materials remains stable in general terms (as illustrated by the graph below) with the notable exception of bricks which continue to exhibit increasing prices due to the demands from the growing housing market. The latest monthly statistics from the Department for Innovation Business & Skills show that annual inflation in material costs was 0.7% in December, down from 1.0% the previous quarter, but with bricks increasing from 7.3% to 8.8%.
Other materials’ prices were subdued, with price increases of 2% or less, but with structural steel and reinforcing bars recording price falls of 4.4% and 3.6%. Despite this drop in the price of steel products, Mace has not noted any falls in the tendered prices for steelwork and reinforcing bars.
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The Building Cost Information Service (BCIS) has again downgraded its Materials Cost Index, which now indicates annual inflation of 0.9% for January, with price inflation forecast to remain below 2% until mid-2016.
