Construction cost inflation to spike by the summer

Aaron Morby 10 years ago

Construction prices will soar in the first part of the year as pricing power shifts to subcontractors.

A sharp upward correction of construction prices in the first part of this year is predicted by experts at Deloitte Real Estate.

The authors of its property report for 2014 warn that there are serious risks of a spate of contractor failures or distressed merger activity as firm’s struggle to deliver already secured jobs at quoted prices.

They warn big changes are looming as contractors become more choosy about jobs they take and the prices they commit to in the recovering market.

“The signs of an impending spike in construction costs are becoming increasingly apparent with estimating departments busy, demolition contractors sold out and contracts for small or complex jobs beginning to become hard to place,” warns the report.

“We expect that this will soon translate into a sharp shift in the overall construction cost index as margins return to a more normal and sustainable level.

“This will be seen first in the early stage construction processes such as demolition, groundwork and concrete trades, as well as smaller, complex jobs that are less attractive to contractors.

“It will also be multi-speed depending on sector and geography, with the hot markets such as London commercial and residential, and national distribution warehouses, seeing prices rising earlier.”

Deloitte warns that jobs priced and committed in the last few months run a risk of being unable to hire subcontractors and trades at the costs expected at the time of securing work.

“There is a real possibility this will result in increasing M&A activity as businesses falter, or even a complete corporate failure.”

The authors believe that pressure on wages will not be as severe as seen in past recoveries because of increased flexibility in the UK labour market.

But it predicts senior positions and skilled trades will continue to remain in short supply and so buck the general depressed wages trend.

There is also expected to be some downward pressure on costs as overseas firms, like Chinese cladding contractors, begin to establish in the UK.

Innovations in processes and materials will also be a factor in continuing to drive shorter construction periods at reduced costs.

As a result Deloitte predicts that after the sharp upward correction, the market will return to a more normalised period of cost price inflation later in the year.

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