According to the latest Royal Institution of Chartered Surveyors construction market survey fierce competition for work is putting the squeeze on labour rates as contractors are forced to absorb rising material prices to win work.

Material costs rose dramatically in the last quarter of 2010, with 56% more surveyors reporting a rise in costs, up from 28% during the previous three months.

But tradespeople and professional costs fell, reflecting increased competition for jobs, which is driving down the cost of labour.

Surveyors said the market became increasingly competitive in the last quarter of 2010 as firms struggled to secure work from a smaller and diminishing pool of opportunities.

Paul O’Shaughnessy at the Berkshire-based Andrews Partnership, said: “A shortage of work is pushing contractors to be more competitive, while clients are becoming more aggressive at capitalising on this situation.”

Alan Robinson at Tompkins Robinson Surveyors in Northamptonshire, said: ” While the politicians speak of a recovery being underway, first-hand experience indicates a bottoming out of the downturn at best.

“Tender prices remain extremely competitive, landing around 2004/5 levels.

As a result, surveyors predict that jobs will continue to be lost, with 14% more respondents expecting employment levels to fall rather than rise over the next 12 months.

David Heron at Miller Construction’s Edinburgh, office warned: “Continued overly aggressive pricing levels still being pursued by certain contractors is driving down tender prices to unsustainable levels.”

The latest survey showed workloads continued to fall in the fourth quarter of last year with 5% more surveyors reporting falls than rises.

This is a slight improvement on the 10% recorded in the previous three months, but the national average hid steep regional falls.

London and the South East was the only region to report rising activity. The rest of the country saw sharp falls with Northern Ireland and Scotland suffering most.

As a result of government spending cuts, public housing and public non-housing sectors were the hardest hit with 20% more surveyors reporting falling activity.

Surveyors warned that the spare capacity created by falling public sector workloads is yet to be replaced by the private sector.

Simon Rubinsohn, RICS Chief Economist, said: “Although bad weather at the end of the year will clearly have had some impact on responses to the survey, the bigger picture here is of an industry under significant pressure as public spending cuts begin to bite, while there is little sign of a private sector recovery across large parts of the country.”