Construction inflation in London is set to rise by three times the rate of consumer inflation over the next two years, says EC Harris. The international consultancy's latest Economic Survey shows that building tender price inflation in London is forecast to run at 6.3% over the next year and by 6.5% the following year, some three times the expected rate of consumer price inflation.
The capital accounted for 15% of all UK construction activity during 2006 and with private commercial workload across the UK up by 13% in the past year, tender prices in London have been increasing well above the national average where tender prices rose by 4 - 4.5% over the past year. There can be little doubt that construction activity in the capital will continue to ride high in the foreseeable future. Almost two years after London was awarded the Olympics, construction is building up to deliver, although most of the contracts placed to date have been infrastructure or enabling works. Nevertheless, as more Olympics schemes come through, they will be competing with the very busy commercial market for a limited supply of labour and materials
Commenting on the figures, Paul Moore, Head of Cost Research, at EC Harris said: "London's construction industry is incredibly busy right now. On the commercial side, demand is expected to remain high through to 2008. Clients are bidding for sites, applying for planning permission and looking for early starts, partly in response to current high levels of demand, partly to secure the supply chain, and partly to mitigate inflation worries. The desire to start on site as quickly as possible is adding to the problems for contractors and these time pressures invariably have a price premium.
"The pressure being faced in the market today, in terms of workload, supply chain capacity and the impact of major schemes like the London Olympics means that it is inevitable that tender prices will continue to rise faster than retail price inflation. "On smaller schemes there still remains some leeway for negotiation. On larger schemes, however what we are finding is that there is a limited number of contractors who might appear on tender lists and as a result figures for overheads and profits are becoming ring fenced. "On the larger schemes we have very much moved into an era of early contractor involvement, framework agreements with key contractors and moves to secure the supply chain to ensure successful delivery."
Source: EC Harris