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Construction Prices Showing Signs of Collapse

January, 2009

Contractors are seeing a gaping hole in their future workload and the outlook is bleak as private sector construction grinds to a halt.  So says the latest market forecast which provides clear evidence of how construction prices have dropped far more steeply than previously predicted. 

The average price fall of 7.5% measured by Davis Langdon in the last quarter is more than was expected for the whole of 2009.

This bad news comes on the back of national news coverage this week on threats to PFI-funded projects and a review of the BSF programme.  Delays and cancellations caused by difficulties in securing private finance are threatening construction jobs as well as a core plank of the Government’s investment programme.

Public sector non-housing and infrastructure are the only two sectors expected to generate any growth over the next two years and any uncertainty with regard to both government investment and PPP funding is a great concern for all in the industry.

Contractors are being hit hard with small operators seeing a drop in workload first.  According to the latest State of Trade Survey by the Federation of Master Builders, a large proportion of small and medium-sized contractors are predicting up to 90,000 job losses in 2009.  In an attempt to win work and make schemes more viable, contractors are passing on savings resulting from the collapse in commodity prices, including steel and reinforcement, as well as reducing their own margins. 

Maren Baldauf-Cunnington, one of the authors of the Davis Langdon report says, “The two-year commodity price boom has come to an end, with prices collapsing during the second half of 2008.  Commodity prices are now set to overshoot to the downside and oil prices could fall below the $30-mark in 2009, despite OPEC intervention.  This is already resulting in falling investment, so the seeds for the next price boom are already being laid.”

Tender prices are forecast to fall by 5 to 8% over the coming year, with a fall in Greater London of 6.5%.  Looking forward, Davis Langdon predicts that tender prices will not bottom out until 2011, by which time a large number of business failures, a shrunken labour pool and reverse migration will have affected industry capacity. 

It is cold comfort to know that the recession is a global one, and that it is affecting the US, Eurozone and UK.  It is also predicted that emerging markets will suffer a decelerated growth.  The construction markets of US and Western Europe are the worst affected, resulting from lack of credit and business contraction.  Whilst the governments of these regions have announced increases in public investment on infrastructure, this will not offset the fall in private demand. 

The drop off in private sector work across all areas in the UK – residential, offices, retail and industrial – means that the country will see at least two years of decline, with a 12% reduction in the volume of construction forecast by the end of 2010.  The downturn in the UK economy is compounded by the currency markets of sterling which is expected to remain weak in 2009.