Pictured above: David Martin, a director within GVA Birmingham's Building Consultancy team

GVA's quarterly review of the construction market has revealed that material price growth is increasing the pressure on already tight contractors' margins, with continuing competition for tender prices.  

GVA's Building Consultancy team reports the fit-out market has been badly affected by rising material prices, whereas house building less so, because there is less reliance on the steel industry. Whilst some contractors may not guarantee material prices in their tenders, this will risk their tender not being considered. 

In the West Midlands, with occupier demand relatively subdued and finance availability constrained, there has been no surge in commercial development activity. There is a similar situation in the residential market, with prices having risen more in London than in the regions, but with little change in prices over recent months.

David Martin, director within GVA Birmingham's Building Consultancy team said: "Development activity has improved a little in the commercial and residential sectors over the past quarter, but from a very low point, which was about a third of pre-recession levels. Recent development activity is also lower than in each of the previous two recessions, even though the size of the economy is now much greater than it was then. With severely restricted bank finance and uncertainty about the economy, this situation seems unlikely to change in the short-term.

"Tender prices have generally been falling since the beginning of 2008, but in line with other construction data, they rose surprisingly sharply in Q2 2010, by 4.3 per cent on the previous quarter. Since then, tender prices have stabilised but are still 14 per cent below their peak in Q4 2007, though they are forecast to climb steadily by about three per cent per annum through 2011 and 2012."

GVA reports that materials prices rose by seven per cent in 2010, which compares to general inflation of 4.8 per cent (Retail Price Index). Whilst prices slowed towards the end of 2010, they are forecast to continue rising at rates above inflation throughout 2011.  

Analysis into specific materials costs highlights some steep rises for certain commodities. Copper is at an all-time high and costs almost three times the price of three years ago, while iron ore - the principal component of steel - has doubled in price since summer 2010. This is primarily due to the veracious demand from China and India. Tata Steel, which supplies to the UK construction market, announced prices will increase again this spring, and the effect of this will be felt on projects comprising elements of fabricated steel products and reinforcement.

With the price of oil above $100 per barrel, products that are oil based, such as roofing felt, paints and specialist coatings, are already seeing steady price increases. Rising material costs are proving to be a real problem for contractors who are unable to pass on these increases fully to their clients. 

David Martin continues: "Off-setting the materials cost to a degree, it is expected that labour costs will remain subdued over the next two years as the level of construction work remains considerably below pre-recession levels. As a benchmark, the Construction Products Association (CPA) reports that only eight per cent of firms are experiencing difficulties in recruiting skilled labour, which compares with pre-recession levels of between 60 - 80 per cent. 

"Overall, the construction market remains weak, despite recent reports indicating an increase in both activity and tender prices. Contractors' margins remain depressed in a competitive tender market, with available work still well below pre-recession levels. We are likely to see more heavily qualified tenders which exclude certain items that are at risk of commodity price rises. 

"However, whilst the level of commercial property development remains very low, sentiment does appear to be improving. Activity also appears to be increasing in the private house building and civil engineering sectors. Uncertainty regarding the fragile state of the economy continues however to hamper the start of new schemes across all sectors. House builders remain cautious in bringing excess stock to the market, in the absence of favourable lending conditions and declining values." 

David Martin concluded: "Construction activity in the short-term is not likely to recover significantly due a combination of poor viability, the weak outlook for occupier demand and the time needed for the industry to rebuild capacity following the loss of 280,000 jobs since 2008. Any recovery is only likely to commence from 2012 onwards if favourable economic circumstances permit. This growth however is likely to be sluggish as cuts in public sector spending deepen and tax rises take hold."