Construction price deflation of 7% predicted over next year

Prices in construction are expected to fall by 7% over the next year, as demand for materials falls and mass redundancies boost the labour supply.

Peter Fordham, author of a Davis Langdon report published last week, warned that construction was heading for a period of price deflation across the board, where clients would once again find themselves "in the driving seat" allowing them to go down the single stage competitive procurment route.

He said: "For the last 18 months to two years contractors have probably been in the driving seat. They have been able to dictate what sort of procurement routes we go down, so two-stage tendering has been pretty much the norm because that’s the only way the contractors would be interested in a project. Now that’s suddenly gone into reverse."

He added that price deflation could occur dramatically: "We have talked about prices falling by 7% over a year, but I get a feeling that the reduction could happen faster than that. I think we’re not far of -5% already."

New orders obtained by contractors across the UK have fallen sharply in 2008, with the second quarter showing the lowest level of new orders in real terms since 2004. Housing was down by 30% but private industrial fell even more quickly, by 36%.

Meanwhile new work output is expected to drop by 9% in 2009.

The steep reduction in demand means that steel prices, notably reinforcement bar, have lost all of the gains they made earlier in the year. Fordham estimated prices had dropped around 100% or more, back to the levels they were at the start of the year.

And he added that the news of price deflation will be most worrying to contractors who rely on competitive tendering work, while those tied into framework agreements should remain insulated from the effects, at least for a time.