october 2008 bcis quarterly briefing

EXECUTIVE SUMMARYBCIS

© RICS - October 20081

M Tender prices remained unchanged in 2nd quarter 2008 compared with the previous quarter but rose by 2.5%compared with a year earlier.

3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08

Percentagechange onprevious quarter -1.3% +1.8% +3.0% +0.8% +3.3% +0.4% -1.2% 0

M The General Building Cost Index rose 4.9% in the year to 2nd quarter 2008.

M Materials costs rose 5.5% in the year to 2nd quarter 2008, whilst nationally agreed wage rates rose 4.4%.

M Materials prices are expected to rise at around the level of general inflation over each year of the forecast.

M Wage settlements are expected to be agreed above the rate of inflation during the forecast period.

M New orders for construction fell by 8% in 2nd quarter 2008 compared with the previous quarter and by 20%compared with the same quarter a year earlier.

M New work output is expected to fall in 2008 and 2009 and then remain unchanged in 2010, as the credit crunchand slowdown in economic growth hits the construction sector. The sectors to be worst hit over the next coupleof years are private housing and private industrial and commercial. However, the public non housing andinfrastructure sectors are expected to grow over the next three years, assuming that the promised public fundingis forthcoming.

M The Construction Confederation report that the degree of difficulty in securing skilled labour as a whole fell in 2nd quarter 2008 compared with the previous quarter. The difficulty in recruiting bricklayers, carpentersand plasterers also eased, with bricklayers being the most difficult to secure.

M Tender prices are expected to fall over each of the next two years on the back of falling new work output in2008 and 2009. However, strong input cost pressures over the next few quarters may limit the fall in tenderprices during this period.

Summary of Forecasts

Annual % change 3Q06to

3Q07

3Q07to

3Q08

3Q08to

3Q09

3Q09to

3Q10Tender Prices +9.2% -1.2% -2.8% -0.8%Building Costs +4.7% +6.7% +3.1% +3.7%Nationally Agreed Wage Awards +4.4% +4.6% +4.6% +4.7%Materials Prices +5.2% +7.2% +2.5% +2.5%Retail Prices +4.3% +4.5% +3.0% +2.1%Construction New Work Output* +4.2% -2.0% -3.0% 0

* Year on year (ie 3Q06 to 3Q07 = 2006 to 2007)

BRIEFINGBCIS


Figure A. Cost Trends

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1090

140

190

240

290

BCIS All-in TPIBCIS GBCI

ForecastActual

Base Index 1985 = 100

Figure B. Activity Indicators

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 85

6

7

8

9

10

11

12Constant 2000 Prices Seasonally adjusted (£BN)

ONS Value of New Work Output

ONS Value of Orders for New Work

Figure C. Market Conditions Index

858687888990919293949596979899000102030405060708091060

70

80

90

100

110

120 Actual Forecast

Market Conditions Index = TPI x 100GBCI

BUILDING COST TRENDS

BRIEFINGBCIS


85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

0

5

10

15

20

-5

-10

-15TPI Annual % ChangeRPI Annual % Change

Source:BCIS,ONS

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0890

140

190

240

Southern & EasternRest of UK

Source: BCIS

1.0 LATEST TRENDS

1.1 Indices: 2nd Quarter 2008 (provisional)Tender prices remained unchanged in 2nd quarter2008 compared with the previous quarter, but rose by2.5% compared with the same quarter a year earlier.In the year to 2nd quarter 2008, retail prices inflationrose by 4.1%. One of the key drivers of tender prices,new work output, fell by 3% in 2nd quarter 2008compared with the previous quarter, and by 1%compared with a year earlier. Furthermore, contractorsare expecting workload to decline in 3rd quarter 2008and new work output is forecast to decline by 2.0% in2008 as a whole and by 3.0% in 2009. This wouldsuggest that at the very best tender prices will remainunchanged next quarter, despite quite strong inputcost increases, but are probably more likely to fall.

Figure D. Tender Price Inflation(Year on Year Percentage Change)

The BCIS General Building Cost Index rose by 1.5%in 2nd quarter 2008 compared with the previousquarter, and by 4.9% compared with a year earlier.

The Market Conditions Index fell in 2nd quarter 2008.

1.2 Indices: 1st Quarter 2008 (revisited)Based on an improved sample size, the BCIS All-inTender Price Index for 1st quarter 2008 has beenrevised upwards to 247 from 244, the figure publishedin July 2008. The year on year increase in 1st quarter2008 currently stands at 3.3%.

In the BCIS Rest of the UK Sample, the 1st quarter2008 index remains unchanged at 254, and nowrepresents an 8.1% annual increase. In the BCISSouthern and Eastern Sample, the 1st quarter 2008index now stands at 226, up from the July 2008 figure

of 222, equating to a 6.6% fall in tender prices.However, the sample size remains very small.

The 1st quarter 2008 index for the BCIS Private SectorTender Price Index has been revised downwards to 243from 248, the annual change in prices standing at a fallof 2.8%. The sample size remains small. In the BCISPublic Sector Tender Price Index the 1st quarter 2008index has been revised upwards to 240 from 235, withtender prices having risen by 7.1% compared with ayear earlier.

Figure E. Broad Regional Trends

Table 1. Regional Price Trends

Region Percentage Change

1Q08 – 1Q07 4Q07 - 4Q06

ScotlandNorthernNorth WestYorkshire and HumbersideEast MidlandsWest MidlandsEast AngliaSouth EastLondonSouth WestWales

+8.7%+6.0%+3.5%

+5.7%+5.9%+3.4%+4.5%+7.7%+9.2%+6.7%+7.7%

+9.3%+6.5%+5.4%

+6.2%+6.8%+8.3%+8.4%+7.9%+7.8%+6.8%+8.3%Source: BCIS

The rate of annual percentage change in regional tenderprices fell in all regions in 1st quarter 2008, except inLondon where the rate rose.

BRIEFINGBCIS


19961997

19981999

20002001

20022003

20042005

20062007

200880

90

100

110

120

130

140

150

Material & Fuel CostsOutput PricesRPIUnit Wages

Source: ONS

Source: ONS, BERR

80 82 84 86 88 90 92 94 96 98 00 02 04 06

0

5

10

15

-5

-10

-15

GDP - Annual % changeTotal Construction Output - Annual % change

The majority of trade prices rose in the year to 1stquarter 2008, with drainage, insitu concrete, metalroofing and paths having double digit increases. Sometrades had falling prices over this period includingdemolitions, sheet roofing and tile roofing which haddouble digit falls.

2.0 ECONOMIC BACKGROUND

2.1 InflationThe annual rate of inflation as measured by the retailprices index (RPI) fell to 4.8% in August 2008 from5.0% in the previous month. The Consumer PricesIndex (CPI), which is the Government’s measure ofinflation, rose to 4.7% in August 2008 from 4.4% inJuly 2008. The CPI is currently well above the targetlevel of 2.0% set by the Government.

Manufacturing input costs continued to rise sharply inthe year to August 2008, rising by 16.4%. Over thesame period, manufacturing output prices (excludingfood, beverages, petroleum and tobacco) rose by6.4%, which would suggest that the full impact ofinput cost increases are not being fully passed on inprices.

Unit wages costs rose by 1.9% in the year to July2008.

Figure F. Manufacturing Prices and Costs

According to the Treasury, the average of independentforecasts shows retail prices inflation falling slightlyto 4.6% by the end of 2008, falling further to 2.3% bythe end of 2009.

Table 2. Inflation Forecast

Forecast Date ofForecast

RPI Inflation % Year to Q4

2008 2009

Av Independents 39667 4.6% 2.3%

Source: Treasury

2.2 GrowthThe annual rate of growth, as measured by the changein Gross Domestic Product (GDP), fell in 2nd quarter2008 to 1.7% from 2.4% in the previous quarter.

Figure G. Gross Domestic Product (GDP)and Total Construction Output- Annual Percentage Change

In the past there has been a reasonably closerelationship between the annual percentage change inGDP and the annual percentage change in totalconstruction output. The annual percentage change inGDP rose to 3.0% in 2007 from 2.9% in 2006. Overthe same period, total construction output rose to 2.6%from 1.1%. It is anticipated that GDP growth will slowto well below long term trend in 2008 and 2009,suggesting that total construction output growth shouldslow over this period. According to the forecastprepared by the Construction Products Association(CPA), total construction output will fall in 2008 and2009 (Table 12).

BRIEFINGBCIS


The Treasury report that the average of independentforecasts show growth slowing to 1.4% in 2008,slowing further to 0.9% in 2009. In the medium term,the rate of growth is expected to accelerate, with theaverage of independent forecasts showing increases of2.2% in 2010, and 2.6% in 2011 and 2012.

Table 3. GDP Forecasts


GDP %Year on Year

2008 2009

Treasury 3/08 1.8 - 2.3% 2.3 - 2.8%

AvIndependents 8/08 1.4% 0.9%

Source: Treasury

Fixed investment, which includes new construction,fell by 5.3% in 2nd quarter 2008 compared with 1stquarter 2008, and by 2.1% compared with the samequarter in 2007.

According to the Treasury, the average ofindependent forecasts for fixed investment shows itrising by just 0.3%in 2008, but falling by 0.7% in2009.

Table 4. Fixed Investment


Fixed Investment %Year on Year

2008 2009

Treasury 3/08 1.8 - 2.3% 2.8 - 3.3%

AvIndependents 8/08 0.3% -0.7%

Source: Treasury

2.3 Interest RatesThe Bank of England’s Monetary Policy Committeedecided to keep interest rates unchanged at itsSeptember 2008 meeting; rates remaining at 5.0%.Interest rates last changed in April 2008, when theywere reduced by 0.25%.

The Treasury report that the average of independentforecasts shows rates remaining unchanged at 5.0% atthe end of 2008 and falling to 4.25% by the end of2009. The medium term forecast shows rates rising in2010 to 4.75%, rising further to 5.0% in 2011 andstaying there in 2012.

3.0 MATERIALS

3.1 Demand and SupplyAccording to the Builders Merchants’ Federation, salesrose by 5.7% in 2nd quarter 2008 compared with theprevious quarter, but fell by 6.8% compared with ayear earlier. In the year to 2nd quarter 2008, all regionshad falling sales.

3.2 PricesMaterials prices rose sharply in 2nd quarter 2008compared with the previous quarter, rising by 3.1%.Materials prices also rose by 5.5% compared with 2ndquarter 2007. Retail prices inflation rose by 4.1% in theyear to 2nd quarter 2008.

There have been some notable rises in some materialsprices between 2nd quarter 2007 and 2nd quarter 2008including steelwork and lead. The BERR FormulaFluctuations Index for Steelwork Materials rose by10.1% in the year to 2nd quarter 2008. Corus have alsoannounced that there is to be a further increase in thecost of steel sections amounting to £60 per tonne fromthe end of September 2008. The British SteelworkAssociation believe that this will be the last increase of2008.

Disaggregating the materials costs from the BERRFormula Fluctuations Index for Leadwork shows thatlead rose by 45% in 2nd quarter 2008 compared withthe same quarter a year earlier. The index also suggeststhat the cost of lead will fall by around 6% in the yearto 3rd quarter 2008. Figures from the London MetalExchange shows lead rising by just 6% in between 2ndquarter 2007 and 2nd quarter 2008 However, it showedan annual increase of 62% in 1st quarter 2008, whichis probably what has been picked up in the BERRLeadwork Index in 2nd quarter 2008.

Other materials that had significant increases in theyear to 2nd quarter include sand and gravel, up by 7%,crushed rock, up by 14%, coated roadstone, up by 14%and cement, up by 11%.

The price of crude oil rose by over 80% in 2nd quarter2008 compared with a year earlier. The BERR FormulaFluctuations Index for Gas Oil Fuel also shows a largeincrease of 73.2% over the same period. In August2008, world crude oil prices were around $115 a barreldown from a peak of around $135 a barrel in July2008. Oil prices still remain historically high as shownin Figure I. Although oil prices have been fallingrecently, the annual increase in prices is expected toremain high in the short term.

BRIEFINGBCIS


78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 0850

100

150

200MaterialsRPI

Source: BCIS, NS

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Jan 97Jul

97Jan

98Jul

98Jan

99Jul

99Jan

00Jul

00Jan

01Jul

01Jan

02Jul

02Jan

03Jul

03Jan

04Jul

04Jan

05Jul

05Jan

06Jul

06Jan

07Jul

07Jan

08Jul

080

20

40

60

80

100

120

140

Source: USEIA

Materials prices are expected to rise well ahead ofgeneral inflation over the next few quarters, withstrong demand continuing from developing countriesand with oil prices significantly above a year earlier.The market is expected to settle down by the secondhalf of 2009, with materials prices rising at around thelevel of general inflation over each year of theforecast.

Figure H. World Crude Oil Prices (Monthly Average Price Per Barrel)

Figure I. Construction, Materials and Retail Prices

Table 5. BCIS Forecast of Materials Prices

Period Forecast

3Q08 to 3Q09 2.5%

3Q09 to 3Q10 2.5%Source: BCIS

4.0 LABOUR

4.1 DemandThe Office for National Statistics (ONS) are currentlyundergoing a review of employment statistics, so thenormal source of our information on constructionemployment is currently not available. However, ONShave published data on total construction employmentwhich remained unchanged in 2nd quarter comparedwith the previous quarter, but fell by 1% comparedwith a year earlier.

The Construction Confederation (CC) report that 24%of firms were experiencing difficulties in recruitingskilled labour in 2nd quarter 2008, down from 33% in1st quarter 2008. The difficulty in recruitingbricklayers fell to 29% from 33%, for plasterers to 26%from 49% and for carpenters to 26% from 36%.

Table 6. Percentage of Firms ReportingDifficulties in Securing Skilled Labour

Quarter Bricklayers Carpenters Plasterers

2006 i 53% 50% 68%

ii 39% 42% 49%

iii 43% 36% 54%

iv 43% 48% 51%

2007 i 59% 56% 76%

ii 54% 47% 61%

iii 56% 44% 52%

iv 26% 26% 56%

2008 i 33% 36% 49%

ii 29% 26% 26% Source: CC

BRIEFINGBCIS


Source: CC

04 05 06 07 080

20

40

60

80

100

All Trades %

4.2 Earnings, Wages and RatesAverage earnings in the whole economy in 2ndquarter 2008 rose faster than those in the constructionindustry, rising by 3.7% compared with 2.8%.

Figure J. Overall Difficulty inSecuring Skilled Labour

Operatives in the heating and ventilating industry willreceive a 4.0% increase in wages from 6 October2008, the final part of a three year wage award.

Table 7. Construction Industry Wage Awards

OperativeDate

Trade Award

01/01/0801/01/0807/01/0807/01/0807/01/0828/01/0802/06/0809/06/0823/06/0830/06/0830/06/0820/07/0804/08/0806/10/08

Thermal Insulation IndustryFlat Glass IndustryPlumbers- EnglandElectricians - EnglandElectricians - ScotlandSteelworkersPlumbers - ScotlandBuilders (BATJIC)AsphaltersBuilders (CIJC)Civils (CIJC)DemolitionBuilders Northern IrelandHeating and Ventilating

7.0%3.5%4.5%4.0%4.0%4.9%4.6%3.8%4.7%6.0%6.0%4.2%6.0%4.0%

Source: BCIS

The average of wage awards is likely to riseconsiderably faster than general inflation over theforecast period.

Table 8. BCIS Forecast of Wage Settlements

Period Forecast

3Q08 to 3Q09 4.6%

3Q09 to 3Q10 4.7% Source: BCIS

5.0 MARKET CONDITIONS

5.1 OutputAccording to the Department for Business Enterpriseand Regulatory Reform (BERR), the total volume ofconstruction output in Great Britain fell by 1% in 2ndquarter 2008 compared with the previous quarter butrose by 2% compared with a year earlier. Total newwork output fell by 3% in 2nd quarter 2008 comparedwith 1st quarter 2008 and by 1% compared with thesame quarter in 2007.

A comparison of new work output in 2nd quarter 2008with the previous quarter shows that the majority ofsectors had falling output. Output in the public housingsector fell by 2%, in the private housing sector by 7%,in the private industrial sector by 14% and in theprivate commercial sector by 4%. The infrastructureand public non housing sectors grew by 7% and 5%respectively.

Analysis of new work output in 2nd quarter 2008compared with 2nd quarter 2007 shows that output fellin the public housing, private housing, and privateindustrial sectors, with double digit falls in the lattertwo sectors. Output rose by 21% in the infrastructuresector, by 15% in the public non housing sector and by3% in the private commercial sector.

BRIEFINGBCIS


Source: BERR

Public Housing

Private Housing

Infrastructure

Public Other

Private Industrial

Private Commercial

Public Housing R&M

Private Housing R&M

Other Public R&M

Other Private R&M

0 10 20 30-10-20-30Annual Percentage Change

Table 9. Construction Output (constant pricesseasonally adjusted)

Sector % change 2Q08 compared with

1Q08 2Q07

NEW WORK:Housing Public PrivateInfrastructureOther new work Public Private Industrial Commercial

-2%-7%+7%

+5%

-14%-4%

-7%-17%+21%

+15%

-21%+3%

Total New Work -3% -1%

REPAIR ANDMAINTENANCEHousing Public PrivateNon-Housing Public Private

+6%+10%

-12%+1%

+11% +8%

+1% +5%

Total Repair andMaintenance +2% +6%

Total All Work -1% +2%Source:BERR

Figure K. Construction OutputAnnual Percentage Change 2nd Quarter 2008(Constant 2000 Prices, Seasonally Adjusted)

5.2 OrdersThe total volume of construction orders in GreatBritain fell by 8% in 2nd quarter 2008 compared withthe previous quarter and by 20% compared with thesame quarter a year earlier.

Comparing 2nd quarter 2008 with 1st quarter 2008shows that orders fell in most sectors, with double digitfalls in the private housing, infrastructure and privateindustrial sectors, falling by 13%, 14% and 27%respectively. Orders rose by 20% in the public housingsector and by 4% in the public non housing sector.

A comparison of 2nd quarter 2008 with the samequarter in 2007 shows that the majority of sectors hadfalling orders with particularly large falls in the privatehousing, private industrial and private commercialsectors, all having falls in excess of 30%. Only theinfrastructure and public non housing sectors hadincreased orders, rising by 30% and 15% respectively.

Table 10. New Orders for Construction (constantprices seasonally adjusted)

Sector% change 2Q08 compared with

1Q08 2Q07

Housing Public PrivateInfrastructureOther New Work Public Private Industrial Commercial

+20%-13%-14%

+4%

-27% -8%

-11%-37%+30%

+15%

-39% -33%

Total New Work -8% -20%Source: BERR

According to the BCIS econometric model, which isbased on the Joseph Rowntree Foundation Model,orders are expected to fall significantly in 2008 andslightly in 2009, returning to strong growth in 2010.

BRIEFINGBCIS


Table 11. Construction Orders Forecast - JosephRowntree Foundation Housing and ConstructionModel

Year on Year Forecast

2008 -14.6%

2009 -1.0%

2010 + 12.5%

Source: JR (9/08)

5.3 HousingAccording to the Department for Communities andLocal Government, housing starts in Great Britain fellby 6.8% in 4th quarter 2007 compared with theprevious quarter and by 5.5% compared with 4thquarter 2006. Over the same comparison periods,housing completions rose by 22.9% and by 12.0%respectively.

The Nationwide Building Society report that houseprices fell by 1.5% in August 2008 compared with theprevious month and by 8.1% compared with a yearearlier. The main reason for the drop off in demand,according to house builders, is the lack of confidencein the market but changes in lending criteria are alsoseen as an issue. The Nationwide expect the nextmove in interest rates to be downward, but they aresceptical about the extent to which this will revive themortgage and housing market while overallconfidence in the economic and housing marketconditions remains low.

According to the Halifax Bank of Scotland (HBOS),house prices fell by 1.8% in August 2008 comparedwith July 2008 and by 10.9% compared with August2007. HBOS believe that a solid employment marketand low interest rates underpin the housing market.However, they also believe that the fall off in housingdemand is due to a squeeze on discretionary income,the high level of average house prices in relation toearnings, and the increased difficulty in obtainingcredit. HBOS expect conditions in the housing marketto remain challenging, although the recentannouncement that the initial stamp duty thresholdwill be temporarily raised from £125, 000 to £175,000should reduce the stamp duty burden on a significantnumber of homebuyers.

5.4 State of TradeThe surveys prepared by the ConstructionConfederation (CC), Federation of Master Builders(FMB), the Construction Forecasting and Research(CFR) and the Chartered Institute of Purchasing andSupply (CIPS)/ Markit , all show contractorsworkload falling in 2nd quarter 2008. The CC and

FMB both report that contractors were expectingworkload to fall in 3rd quarter 2008.

The CC survey shows enquiries falling in 2nd quarter2008. The FMB survey no longer gives an overall viewon enquiries but its survey showed that enquiries fell inevery sector in 2nd quarter 2008.

5.5 Output ForecastsThe Construction Products Association (CPA) revisedtheir forecast of total construction output in October2008. The revised forecast shows total constructionoutput falling by 1.8% in 2008, falling further in 2009by 4.6% and then remaining virtually unchanged in2010 with a fall of 0.3%. Previously, CPA wereforecasting a fall of 1.3% in 2008, a fall of 1.6% in2009 and then rising by 0.7% in 2010.

The CPA forecast of new work output now shows newwork output falling by 3.6% in 2008, by 5.6% in 2009,recovering to a small increase of 0.2% in 2010. CPA’sprevious forecast was for a 1.8% fall in 2008, a 0.7%fall in 2009, returning to a rise of 1.7% in 2010.

The public non housing sector is one of the two newwork sectors that CPA expect to grow over the nextthree years. Strong growth is expected in 2008 and2009, with growth slowing somewhat in 2010. Thegrowth is expected to be supported by the educationsub sector, through the Building Schools for the Futureprogramme, together with the Primary CapitalProgramme and Building Colleges for the Futureprogramme. Health related projects are also expectedto boost growth due to the provision of new hospitalsand GP clinics. 2012 Olympics related work shouldalso add a welcome boost to growth.

The other sector expected to have year on year growthover the next three years is the infrastructure sector. Itis anticipated that growth will be supported by the railsub sector, through projects such as Thameslink, lineextensions, station refurbishments and Crossrail from2010. With an 8% increase in investment in the currentfive year capital expenditure plan (2005 - 2010)compared with the previous plan, the water andsewerage sub sector is set to boost growth in 2008 and2009 in particular. The sector is also expected tobenefit from flood defences and harbour work.

According to CPA, output in the public housing sectoris likely to fall in 2008, recovering to a modest rise in2009, before rising more strongly in 2010. CPA nowbelieve that the government target for newhousebuilding is unlikely to be met in the near future,constrained by the decline in the private house buildingsector.

BRIEFINGBCIS


The CPA expect output in the private housebuildingsector to decline dramatically in 2008, falling by 28%,followed by a further fall of 14% in 2009, with areturn to strong growth of 12% in 2010. The creditcrunch is the root cause of the anticipated significantdecline in 2008 and 2009, which has led to atightening in credit availability for potential housebuyers. Also, the economy is currently suffering fromthe global economic slowdown, and consumers arebeing hit by rising fuel and food prices.

The CPA anticipate that construction output in theprivate industrial sector will go into recession in 2008,and remain there over the following two years.Following significant investment in this sector overrecent years, CPA believe that there is little scope forincreased growth over the coming years, particularlywith the current economic slowdown. Furthermore,manufacturers are having to absorb sharply increasinginput costs rather than passing them on in outputprices, hence reducing profit margins.

In the private commercial sector, CPA expect outputto grow in 2008, but decline significantly in 2009 and2010. Work already on site is expected to supportgrowth in 2008. Although growth in PFI work foreducation and health schemes is likely during the nextthree years, it is unlikely to offset the falls in output inthe offices, entertainment and retail sub sectors whichhave all been hit by the economic slowdown.

Table 12. Construction Output Forecast - ConstructionProducts Association

Sector Percentage Change

2008Forecast

2009Forecast

2010Forecast

Public Housing Private Housing Infrastructure

Public Non-Housing Private Industrial

Private Commercial

-7.0%

-28.0%

+21.6%

+13.7%

-21.7%

+3.4%

+2.0%

-14.0%

+8.4%

+7.4%

-10.0%

-12.7%

+8.0%

+12.0%

+2.0%

+4.2%

-5.9%

-8.6%

Total New Work

Repair &Maintenance

-3.6%

+0.5%

-5.6%

-3.5%

+0.2%

-0.9%

Total

-1.8% -4.6% -0.3%

Source: CPA (10/08)

The JR model shows that output is expected to fallsignificantly over the next two years, returning toabove trend growth in 2010.The model also shows thattotal construction output is expected to rise a little in2008, fall in 2009 and return to above trend growth in2010.

BRIEFINGBCIS


Table 13. Construction Output Forecast - JosephRowntree Foundation Housing and ConstructionModel

Year onYear

Forecast

Total New Work Output

TotalOutput

200820092010

- 4.2%- 9.2%+ 3.8%

+ 0.4%- 3.3%+2.9%Source: JR(9/08)

The BCIS forecast of new work output shows itfalling in 2008 and 2009, and then remainingunchanged in 2010. The credit crunch and theslowdown in economic growth are expected toimpinge on construction output over the next fewyears, with the private housing and the privatecommercial and industrial sectors being hit thehardest. However, the public non housing andinfrastructure sectors are expected to grow over thenext three years, assuming that the promised publicfunding is forthcoming. The BCIS forecast of newwork output is not dissimilar to that of the JR Modelin 2008 and 2009 in that they both expect fallingoutput. However, the JR Model shows a greaterdecline in 2008 and 2009. The BCIS forecast differsfrom the JR Model in 2010 forecasting no changecompared with the JR Model’s above trend growth,but the JR Model is coming off a predicted muchlarger fall in 2009.

Table 14. New Work Output Assumptions

Year on Year Forecast

2008

2009

2010

-2.0%

-3.0%

0Source: BCIS

6.0 TENDER LEVELS

6.1 CapacityThe Construction Confederation report that contractorscapacity utilisation fell in 2nd quarter 2008, with thoseworking at full/almost full capacity falling to 44% from54%.

Table 15. Contractors’ Capacity Utilisation

Period % of firms operating at:

Full/almostfull

2005 i

ii

iii

iv

2006 i

ii

iii

iv

2007 i ii iii iv

2008 i

ii

61

54

57

56

49

66

51

66

53

63

79

65

54

44 Source: CC

6.2 Preliminaries and Profit6.2.1 PreliminariesAccording to the BCIS Study of Contract Percentages,the average level of preliminaries as a percentage of theremainder of the contract sum (excludingcontingencies) rose slightly in 2nd quarter 2008 to15.9% from 15.7% in the previous quarter.

BRIEFINGBCIS


Table 16. Preliminary Percentages

Period Prelims% Sample Size

2007 i 15.2 135

ii 16.3 93

iii 15.6 94

iv 15.9 72

2008 i 15.7 77

ii 15.9 27 Source:BCIS

6.2.2 ProfitThe BCIS study of Contract Percentages show that theaverage addition made by contractors to buildinglabour in daywork in 2nd quarter 2008 remainedvirtually unchanged in 2nd quarter 2008 at 77%.However, the sample size for 2nd quarter 2008 isquite small.

6.2.3 Tender ExpectationsAccording to the Construction Forecast and Research,contractors reported in 2nd quarter 2008 that theyexpected tender prices to rise next quarter. A recentBCIS survey of contractors showed that contractorsexpected workload to fall in the second half of 2008and on balance, tender prices were expected to remainunchanged.

6.3 Tender Price ForecastIt is anticipated that materials prices will risesignificantly faster than general inflation over the nextfew quarters, as a result of continuing strong demandfrom developing countries and with oil pricessignificantly above a year earlier. In the second half of2009, the market is expected to settle down, withmaterials prices expected to rise at around the level ofgeneral inflation over each year of the forecast.General inflation should remain between 2% and 5%over the next two years. The average of wage awardsis likely to remain well ahead of general inflationduring the forecast period.

New work output is expected to fall in 2008 and 2009and then remain unchanged in 2010 as the creditcrunch and slowdown in economic growth hits theconstruction sector. The sectors to be worst hit overthe next couple of years are private housing andprivate industrial and commercial. However, thepublic non housing and infrastructure sectors areexpected to grow over the next three years, assumingthat the promised public funding is forthcoming.

Tender prices are expected to fall over each of the nexttwo years on the back of falling new work output in2008 and 2009. However, strong input cost pressuresover the next few quarters may limit the fall in tenderprices during the period. Table 17. Forecast of Tender Prices

Period Forecast

3Q08 to 3Q09

3Q09 to 3Q10

-2.8%

-0.8%Source: BCIS

7.0 ASSUMPTIONS

7.1 InflationThe rate of general inflation will be around 4.1% in2008, 2.6% in 2009 and 2.5% in 2010.

7.2 DemandNew work output will fall by 2.0% in 2008, 3.0% in2009 and remain unchanged in 2010.

7.3 Labour7.3.1 Building Workers: Increases of 4.0% from

June 2009 and 4.5% from June 2010.7.3.2 Plumbers: Increases of 4.5% from January

2009 and 4.5% from January 2010.7.3.3 Glaziers: Increases of 3.5% from January

2009 and 3.5% from January 2010. 7.3.4 Electricians: Increases of 4.5% from January

2009 and 5.0% from January 2010.7.3.5 Heating and Ventilating Operatives: Increases

of 4.0% from October 2008 and 4.0% fromOctober 2009.

7.3.6 Steelworkers: Increases of 6.6% from January2009 and 4.5% from January 2010.

7.4 MaterialsThe annual rate of inflation for materials will be 2.5%in the year to 3rd quarter 2009 and 2.5% the year after.

8.0 NOTES

The BCIS forecast is a national forecast. Regionaldifferences in demand will have a consequential effecton tender prices in different parts of the country. TheBCIS All-in Tender Price Index is constructed usingprojects based on traditional procurement routes.

Projects based on contractor led procurement methodssuch as design and build and partnering, are notincluded. However, the same general market conditionsapply to all types of procurement routes but some willreact more slowly to changes in demand.

october 2008 bcis quarterly briefing

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