Construction costs will surpass 2006 levels this year and are rapidly approaching the highest levels of the Celtic Tiger bubble, according to new figures from the Society of Chartered Surveyors Ireland (SCSI).
The higher prices have big implications for delivery of the Government’s ‘Ireland 2040’ strategic development plan, in particular for the success and cost of large infrastructure projects.
Higher wages, plus steel and timber costs are driving up the price contractors are seeking to pitch for projects, the SCSI found.
Des O’Broin, president of the SCSI, described the increases as concerning in the shorter term and a challenge for those involved in procurement, especially public procurement which is a fixed-price tender process.
“The current rate of increase is simply not sustainable in the long term,” Mr O’Broin warned.
“The major reason cited by SCSI members for the continuing increase in tender prices is ever-increasing workload, coupled with the skills shortage being experienced by both main contractors and specialist sub-contractors.”
Drivers of higher costs include changes to building regulations and the impact of Sectoral Employment Orders (SEOs), which replaced the old registered employment agreements in the construction industry last year, and set minimum terms for pay, pensions and other benefits employers must provide, he said.
“Labour prices are also rising on foot of the Sectoral Employment Order while the price of steel, timber and other materials, as well as oil, are also increasing,” Mr O’Broin added.
“Other factors contributing to the increase include the application of new Nearly Zero Energy Building regulations – although these will lead to reduced running costs for buildings over their life cycle.
“Further uncertainty around Brexit and tariffs arising from a global trade war are likely to be other contributors” he added.
The Chartered Surveyors said the increases are symptoms of high levels of activity and limited resources.
It will feed into either higher costs, fewer projects, or potentially both, and will inevitably feed concerns of an overheating economy. The SCSI Tender Price Index tracks the bid levels when construction firms pitch for contracts.
The latest quarterly update today shows that prices increased by 3.95pc in the first half of 2018.
The forecasted annual increase for 2018 will be 7.4pc, almost half a percentage point ahead of what the Society predicted at the start of the year.
It means construction prices are on course to be back to the level they were at in the first half of 2006 and just five index points below the peak in the first half of 2007 – which has long been regarded as unsustainable.
“Given the continued rise in tender prices over a relatively short period of time, it will be a concern for contracting authorities receiving tender proposals for national projects that contractors may well run into financial difficulty halfway through – as evidenced in recent school delivery projects,” Mr O’Broin said.
The index shows prices in the first half of 2018 rising fastest in Dublin and the rest of Leinster, but increases were common across all of the regions.