Consultant EC Harris is forecasting only moderate tender price inflation in 2014 as the recovery gets underway. But this year’s steady growth will be followed by price acceleration in 2015 with the need to prepare for higher levels of price escalation than previously forecast.
In its latest quarterly edition of its Tender Price Index, EC Harris is also highlighting a growing divide between prevailing market conditions in London and elsewhere in the UK.
It forecasts that London tender prices will rise by 4% in 2014, increasing to 6% in 2015, fuelled by the acceleration in commercial and residential activity.
Outside London, however, it predicts a slower rate of growth of 2% in 2014 before increasing in 2015-16, subject to the localised impact of major investment programmes.
Simon Rawlinson, head of strategic research and insight, commented: “Despite some fluctuations in recent figures from the industry, we are encouraged by the positive outlook for the sector, particularly with the growth driven in London. As one of the fastest growing sectors in the UK, construction continues to bolster and support the UK economic growth which is reflected in the strengthening tender prices.”
EC Harris also notes other emerging trends. While developers are keen to push ahead with projects to meet demand, it points out that they are now working with contractors that have publicly stated strategies to improve margin and transfer risk.
Main contractors are also less willing to pursue single-stage tenders – partly because trade contractors will not support their bids. Encouragingly, margins and preliminaries associated with two-stage tenders remain competitive but inevitably more of the second-stage inflation risk will be transferred to the client.
It forecasts that tender price increases will also be driven by trades coming under inflationary pressure, lower levels of discounting by subcontractors and suppliers, and the inability of specialist contractors to fund a large number of bids.
Planning, funding and affordability challenges will hold back workload growth during 2014, and overall it says that capacity will remain in balance. This is as a result of relatively low levels of insolvency, the availability of migrant labour and the potential for materials to be imported.
Looking forward, as workload grows, it says that a shift to two-stage tendering will allow some price inflation for the trades, predicted to reach 4% during 2014 and followed by 6-7% escalation for 18 months during 2015/16 before stabilising at around 4% from 2017.
EC Harris says that the upturn portrayed in the latest Tender Price Index has been driven by the general improvement in the economy, growth in construction output and a stronger pipeline, combined with evidence from recent tender analysis and feedback from the supply chain.
As it points out, ONS figures show that construction output rose 8.3% in Q3 compared to the third quarter on a year earlier, while two strong quarters of new orders data indicates a significant increase of activity in the pipeline.
New housing orders are up 41.5% on a year earlier, while commercial construction also gained momentum, climbing 21.4%, albeit from a very low base.
