Tender prices set to increase by one third

New construction output, as well as input cost rises, may produce a 33% surge in tender costs within five years.

Construction tender prices are expected to rise by 33% during the next five years, according to a report published by the Building Cost Information Service (BCIS).

The BCIS, which forms part of the Royal Institution of Chartered Surveyors, made the prediction as part of its five year forecast for the industry.

One of the main reasons behind the anticipated rise is new construction output, which is expected to rise above its long-term annual trend rate over the next five years, as well as pressures from input cost rises such as labour and materials.

BCIS managing technical editor Peter Rumble said: "Tender prices are expected to rise by more than two-and-a-half times the rate of inflation over the next five years, rising 33% against a background of 12% general inflation."

Adding to the stimulus for growth, says the report, is a likely upsurge in the private commercial sector and increased PFI work in the heath and education sectors. This comes in response to the government recently giving the green light to £1.5bn of PFI health schemes.

In tandem, there is a planned rise in infrastructure growth, with an anticipated recovery in Highways Agency work and new investments in the water and electricity industries.

Wage awards are also expected to continue to outstrip inflation throughout the forecast period.

In the first year of the forecast, material prices are predicted to increase above inflation, as increases in steel and oil prices continue to feed through.

However, BCIS general manager Andrew Thompson urged the government to take caution when releasing funds to help relieve cost pressures.

"Were the government to reign in any of its public expenditure projects, this would ease construction pressures," he said.

Allan Wilén, economics director at the Construction Products Association, urged contractors to be aware of the cost pressures coming through when tendering for works.

"On the materials side, we are definitely witnessing cost pressures brought about by increasing energy costs, although we are still looking into whether the issue is with us for the short or the long term.

"With increasing wage settlements, the industry needs to be sure it is bringing through the productivity and innovation to match the demands."

[Contract Journal, 6 September 2006, p 4]