Record prices are being paid on world markets for copper, energy prices are up 15% and reinforcement and structural steel prices are up by 12% and 10.5% respectively. Contractors who won projects by bidding low are set to come unstuck.
EC Harris also predicts that building tender prices will also stop falling and start rising slightly within the next few weeks.
Nationally, building tender prices will stop falling in Q2 but will increase by just 0.2% by the end of the year. In London tender prices will rise 1.7% during the year, having bottomed out already in Q4 2010.
Infrastructure tender prices are predicted to bottom out in the first quarter of 2011 and then pick up to show an annual increase of 2.1% by the end of 2011.
EC Harris’ latest quarterly Market View Report says that while construction tender prices are showing upward signs, clients may experience problems with the delivery of schemes that were signed at excessively low price, now that commodity prices are rising.
Paul Moore, head of cost research at EC Harris, said: “Although we are now expecting tender prices to rise this year, the recovery of the industry is far from certain and could be delayed for a couple of quarters. Contractors’ opportunities to increase their tender prices are likely to remain limited and, even when workload picks up, the worry is the delivery of those low tender priced schemes.”
“Where contractors have pressurised their sub-contractors and cut their profit margins to the bone to secure workload, rapid increases in costs could mean that contractors find themselves caught out with limited options to recoup their losses. Previous recessions indicate that the most dangerous time for insolvencies is when workload picks up. That brings with it the pressure of increased costs which can be enough to drive contractors on fixed price contracts into failure.”
Infrastructure tender prices, on the other hand, have not been impacted by a fall in workload, but rather due to lower wages and increased competition. Following the government’s Autumn Review there is likely to be a shift in focus towards the rail and renewable sectors for long term revenue.
The full report can be downloaded from here.
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