Jon White, UK managing director of Turner & Townsend, looks behind the figures in its recent International Construction Market Survey, and at possible consequences in the London market.
Jon White
This month Turner & Townsend’s International Construction Market Survey confirmed what many of us had suspected – construction costs in London are now among the highest in the world.
In fact at £2,283 per sq m, London’s average construction cost is second only to New York’s, which, at £2,372 per sq m, is the world’s highest.
The global research, which analysed input costs – such as labour and materials – and charted the average outturn cost per sq m for both commercial and residential projects, also found that overall costs in both London and New York are rising at 5% a year.
Unsurprisingly, London’s costs, and the rate at which they are rising, outstrip those in the rest of the UK. But in many ways it’s the comparison the report makes between London and New York that’s most instructive.
Both cities are enjoying similar property booms. £70bn is forecast to be spent on construction in New York during the next three years, compared to £62bn in London.
Both cities have powerful financial sectors and are seeing steady price inflation amid intense development in both commercial and residential property.
But London’s construction managers enjoy a huge labour cost advantage over their American counterparts. New York’s construction workers earn an average of £53 per hour, compared to the £32 earned by builders in London.
So it’s striking that despite having a workforce nearly 70% cheaper than New York’s, London’s overall cost of construction is just 4% lower.
Why London’s labour cost advantage isn’t more decisive
While London’s construction sector labour costs are the highest in the UK, and high by global standards, they are substantially lower than those in New York.
The research found that a “ready supply” of construction workers from other EU countries has helped to limit wage increases in the capital.
By contrast it concluded that in New York labour is heavily unionised on large projects, with trade unions currently enjoying a resurgence of strength given the volume of work.
Despite its high cost, New York’s labour force is highly productive – weekend working is commonplace and contractors have a more efficient approach to logistics.
So while it is more expensive than London’s workforce, New York’s labour force is more productive.
Labour costs account for around 40% of overall construction costs in London, so while wages are an important element, London’s overall construction costs are being driven up by a matrix of different factors – from raw materials to the cost of getting equipment onto sites with restricted access.
The risks of overstretch
With the capital’s new-build housing sector – and particularly the high-end residential market – seeing extraordinary rates of growth, demand is outstripping supply in several areas.
As a result, contractors are being very selective about the projects they take on, and tender pricing has become volatile.
Most Tier 1 contractors are now declining single-stage projects to minimise tender costs and risk. Even on two-stage projects, clients and project managers need to engage with the supply chain early to explore their interest, and demonstrate that projects have been de-risked.
Many contractors are experiencing skills shortages as they seek to ramp up capability quickly to meet surging demand.
All of this is stretching the supply chain, which ultimately won’t just lead to rising prices – there’s a danger it could also cause quality issues and missed deadlines.
This is why it has become critical for developers to mitigate these risks by seeking early advice on market appetite, and the most suitable contract terms and conditions to use when procuring.
As a result project managers are set to be more in demand, and under greater scrutiny than ever.
