Global construction consultant Davis Langdon reports that after six consecutive quarters of price drops that have rocked the industry, there are at last signs of a pick up in the cost of construction. In its latest Market Report, the firm reports that the first quarter of 2010 saw a 0.5% rise on the quarter before. This is another tentative sign of recovery, and backs up recent reports of an increase in activity – particularly in the commercial buildings sector.

Of course the big question is: ‘Have we seen the worst?’ According to Davis Langdon the answer is ‘Possibly – though there are likely to be a few more bumps along the road to a sustainable recovery’.

Peter Fordham, one of the firm’s Construction Economists comments: ‘I would describe the industry as having seen the worst of the highly dramatic falls. We are now bumping along the bottom. It is fair to say there are some encouraging signs, with GDP growing, house prices rising and industrial production on the increase – so cautious optimism is probably the order of the day’.

Why cautious? It seems it is all in the timing. Fordham warns: ‘One could argue that the approach of the end of the financial year has seen schemes rushed through – taking advantage of the low construction costs which are back to their 2005 level as contractors and their supply chains have drastically cut labour costs, preliminaries costs and profit and overheads levels in response to a 30% drop in new orders. However, this rise in activity may not be sustained into the rest of the year.

Construction output is expected to fall further this year thereby further increasing competition, but this will be countered by rising material costs, particularly steel.  Global steel prices have risen by 50% over the last year with much of the increase in 2010 driven by higher raw material costs. UK steelmaker, Corus, has sought a number of price increases this year, amounting to a price rise of 17% on structural steelwork and reinforcing steel prices have risen even more.  Factors like these mean that we will see the cost of construction remaining roughly static in 2010-11, with a more marked upturn likely for 2011-12. And of course, the big question remains whether the private sector can rise fast enough to cover the decline in public sector work’.

For a full copy of Davis Langdon’s Market Forecast, please use the download link on the left.