Cost increases

2008 should be remembered as a year of two halves. Up until July, clients, contractors and suppliers in most sectors were extremely bullish and the main concern was runaway material prices. Since then, demand and sentiment have evaporated, creating huge challenges for clients and contractors alike. Even the growth areas of the public sector face problems concerning the availability of funding and affordability.

With subdued markets and tight funding for the foreseeable future, controlling costs and focusing expenditure on areas that maximise value will be very important for projects that are fortunate enough to go ahead.

Market conditions update

2008 has seen the pendulum swing from a situation where clients were required to package their projects carefully to secure contractor interest, to one where declining order books are resulting in dramatically lower tender prices. Under the worst-case scenario, prices could continue to be driven down at the rate seen at the end of 2008: 6 to 8% in a single quarter.

However, there are factors that should help shore up prices, including:

• The current level of material and some labour cost inflation
• The likelihood of consolidated capacity affecting the contractor supply chain, material producers, raw materials and labour
• Currency fluctuations will also have a role. Imports are relatively expensive, and UK material suppliers will be very competitive.

At first quarter 2009, Davis Langdon forecasts that prices will continue to drop at 5-6% in 2009. It is unlikely that construction prices will begin to recover until early 2011.