Outside of the capital, prices will remain a bit more stable, increasing 2% in 2014 before increasing by more than 4% in 2015.
These are the forecasts from construction cost consultant EC Harris, which adds that continued growth in the construction sector is having a positive impact on the UK economy, with consensus forecasts indicating GDP growth of 2.4% for 2014.
The upturn in EC Harris Tender Price Index forecasts has been driven by the improvement in general economic data, growth in construction output and a stronger pipeline, combined with evidence from recent tender analysis and dialogue with the supply chain. Construction output also reflects the steady improvement in demand with workload rising 8.3% for the 3rd quarter year-on-year.
Looking forward, two strong quarters of New Orders data indicate a significant increase of activity in the pipeline, with new housing orders up 41.5% on 2012 while commercial construction gathered momentum climbing 21.4%, albeit from a very low base. EC Harris said that its raised mid-term inflation forecasts therefore reflect both accelerating workload growth and growing inflation expectations.
Simon Rawlinson, head of strategic research and insight, said: “Despite some fluctuations in recent figures from the industry, we are encouraged by the positive outlook for the sector, particularly with the growth driven in London. As one of the fastest growing sectors in the UK, UK construction continues to bolster and support the UK economic growth which is reflected in the strengthening tender prices.”
EC Harris observes that main contractors are proving less willing to pursue single-stage tenders, partly because trade contractors will not support their bids. While margins and preliminaries associated with two-stage tenders remain competitive, EC Harris says, more of the second stage inflation risk will inevitably be transferred to the client.
Tender price changes are also driven by trades coming under inflationary pressure, lower levels of discounting by subcontractors and suppliers, and the inability of specialist contractors to fund a large number of bids.
As workload grows, a shift to two-stage tendering will allow some price inflation for the trades; 4% inflation during 2014 will be followed by 6-7% escalation for 18 months during 2015/16 before stabilising at around 4% from 2017.
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