Construction costs on the rise

Build and fit-out costs have risen while project delivery has quickened July 11, 2016 / Isla MacFarlane
Construction costs on the rise

A new quarterly research report by Savills has revealed that build and fit-out costs have risen across all sectors and geographies for Q3 2016, whilst overall project delivery has quickened.

The Savills Programme and Cost Sentiment Survey (S.P.E.C.S) will track sentiment regarding the cost of construction, costs of fit-out and the associated time-scales for all grades and geographies for commercial and residential real estate across the UK.

Simon Collett, head of building and project consultancy at Savills, said, “Our first edition of S.P.E.C.S highlights how current macro events are impacting the construction industry. Cost increases are generally stabilising whereas timescales for larger projects are moving out faster in comparison to smaller schemes. The impact of Brexit will take a number of months to filter into our scores as the direction of any change remains to be seen.”

For central London contractor availability has become a key issue. Demand for services is high, but supply is being constrained due to an ongoing skills shortage meaning at present, contractors are dictating procurement routes to clients. Using data from Gardiner & Theobald, for this reason it is expected that UK average rates of tender price inflation to remain at 4% for 2016 and 3.5% for 2017, before levelling off in 2018.

Paul Davies, director of building and project consultancy in the City office team at Savills, said, “In the coming months we do not expect Brexit to have any immediate impact on the predicted tender price inflation, but timescales and workloads could be impacted as occupiers and developers react.”

A more fully supplied prime central London pipeline has led developers to focus more on outer London locations. Here, much of the capacity is being met by housebuilders creating relatively little call on contractors.

Furthermore, less competitive demand from developers for contractors has seen cost price inflation come off over recent months, particularly in central London. This means that contractors are less able to pick and choose between projects and have shifted away from demanding negotiated contracts. This is leading to some improvement in development timescales, though planning and absorption rates will still dictate timings.

Kevin Mofid, director of research at Savills, added, “This is a truly unique index that will be of particular value to investors and developers concerned about when to start new construction or refurbishment, as well as occupiers considering the fit-out of new space. Now more than ever, people will be scrutinising costs and associated time-scales to ensure that the right decision is being made in regards to their development or existing property.”

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