Past performance indicates that a downturn in development and construction activity should lead to a fall in tender prices and this is something which is being closely monitored by GVA. However, the general trend in tender prices has been upwards since Spring 2010. The Building Cost Information Services (BCIS) records this trend and forecasts that it will continue throughout the year, though this is being lead by the demand for London offices and the remainder of the country will be constrained by the lack of work and could well see further falls.

Material prices have shown strong growth since the beginning of 2010 and this has continued in 2011. According to BCIS, annual price rises in material products peaked at 8% per annum in early 2011, though have now moderated to approximately 5%. The price rises are predominantly due to rises in steel prices, as manufacturers have passed on the increases in raw material commodity prices. Other construction products to see double digit price rises over the past 12 months include crushed rock, concrete reinforcing bars and sawn wood. While initially these price rises were being absorbed in the tender process, more lately tender prices have crept up.

Gordon Hewling, Director of the Building Division at GVA's Newcastle Office said: "This ongoing increase in material prices, with particular regard to steelwork, has seen contractors struggle to hold tender prices at lower levels. The cost of this is being passed directly onto developers and funders and is placing an increasing burden on development margins. In these continuing uncertain times, we have several schemes which have been competitively tendered, though which are subject to ongoing delay as funding is finalised. Contractors are understandably reluctant to hold their tender figure for any significant period of time, particularly when it is known that the material suppliers have significant price rises of up to 10% in the pipeline. Coupled with the increasing demands on building design performance through legislation such as the Building Regulations, this is further squeezing the opportunity for development to take place".

Conversely, labour cost inflation has remained low, at 1% per annum through to the middle of 2011. The majority of wage agreements have remainder well below inflation or frozen and there is no shortage of skilled labour. Wage increases are expected to be muted over the next two years, with workloads still considerably below pre-recession levels.

In summary, Gordon Hewling notes: "The construction market remains weak despite recent reports indicating an increase in tender prices. Labour costs for contractors have generally remained static or have seen increases in line with inflation, though material prices continue to accelerate due to the volatility in raw materials. This has resulted in tender prices being put under real pressure by the increase in input costs. Contractors as a result are generally reluctant to fix these costs and are bidding at cost or below in order to win work in a competitive market place. This is likely to increase the post-contract activity of contractors in order to re-coup their costs through gaps in contract documentation. The onus is on construction consultants to ensure that all documentation is as accurate as possible".

It is clear that uncertainty regarding the fragile state of the economy continues to hamper the start of new schemes across all sectors. Whilst the level of commercial property development remains low, sentiment does appear to be improving marginally. There are some encouraging signs within the sector, with several high profile projects now under construction. However, these are generally limited to London and the south east. Construction activity in the short-term, particularly in the regions, is not likely to recover significantly due to a combination of poor viability, the weak outlook for occupier demand and the time needed for the industry to re-build capacity.

Any recovery is only likely to commence from 2012 onwards if favourable economic circumstances permit. This growth however is likely to be sluggish as cuts in public sector spending deepen and tax rises take hold.

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