« Previous | Contents | Next »
Listen
ANALYSIS OF HISTORICAL CONSTRUCTION COST MOVEMENTS IN SCOTTISH SOCIAL HOUSING FINAL REPORT
1.0 INTRODUCTION
1.1 Terms of reference
In December 2002, the Scottish Executive Development Department commissioned Davis Langdon & Everest to undertake a study into historic cost and price movements in the Scottish construction industry, with particular reference to the refurbishment and maintenance of social housing. The objective of this study is to improve the Scottish Executive's understanding of the extent to which future cost variations are likely to affect the overall costs of carrying out construction projects in Scotland over the medium to long term.
1.2 Research aims and scope of work
The research aims and scope of work are as set out in the Scottish Executive's Research Specification:
1) to examine historical trends in real capital, management and maintenance costs, tender prices and output prices in Scotland
2) to establish the extent to which real capital, management and maintenance costs, tender prices and output prices in Scotland have changed over time
3) to establish the extent to which real capital, management and maintenance costs, tender prices and output prices in Scotland have historically varied with the economic cycle
4) to compare changes in real capital, management and maintenance costs, tender prices and output prices in Scotland with changes in the UK as a whole
5) to provide historical data that can shed light on how real capital, management and maintenance costs, tender prices and output prices have varied across Scotland, determining whether Scotland can be subdivided into different sub regions, with differing costs, and assessing the reasons for these variances
6) to provide data to shed light on how much real wages have changed by in the short run (e.g. past 3 years), medium run (e.g. past 5 years) and long run (e.g. past 10 years or more years) for:
a) DLO staff and local authority staff in general
b) Private sector construction workers
c) Management staff in the RSL sector
7) to determine whether the increases in productivity that have occurred in these areas have offset these changes.
The study aims to provide a 'foundation knowledge' of historic trends, together with, as far as is practical and given the availability of data and uncertainties surrounding future circumstances, an assessment of the main factors that will affect future levels of construction costs in the Scottish Social Housing sector.
1.3 Methodology
The study focuses upon an analysis of historic cost information, principally index series, taken from published and unpublished sources in Scotland and in the UK. The study has looked at in excess of 100 cost and price indices in total from a variety of public and private sector sources. Some indices are only available at UK level whilst others refer specifically to Scotland. The series are examined in combination and in conjunction with a wider range of economic indicators to enable inferences to be drawn from historic data for application on future stock transfer projects.
The principal components of the study are:-
- A survey of available data sources for the project including published and unpublished data.
- An examination of building cost trends in the UK and Scotland, including the construction of a specific social housing refurbishment input cost index, based on an analysis of the project portfolio of a sample of Scottish Local Authorities.
- The comparison of maintenance data for the housing and non-housing sectors based on UK-wide data.
- An examination of tender price trends in the UK and Scotland, including the analysis of specific social housing indices.
- An examination of organisational and management costs including salaries, premises costs and other components.
- A comparison of available location factor information for Scotland.
- An examination of real wage trends and productivity changes.
- A consideration of available short and medium term construction forecasts
The trends identified in the analysis will be examined from a micro-level, in terms of the influence of various component parts affecting the identified cost trends and also from a broader macro-economic perspective, identifying relationships between the indices and other indicators of economic activity.
1.4 Limitations to the scope of the study
The scope of the study is necessarily limited by the availability and quality of relevant data series. This affects the range of cost factors that can be examined, the ability to deliver an analysis focused on the Scottish Social Housing sector and the consistency of the identified trends.
The scope of the study does not include additional primary data collection or creation of indices and in most instances reliance has been placed on existing, published sources of data.
However, in two instances DLE has constructed specific index series for this study:
a cost index for Scottish Social Housing Refurbishment
an index to reflect management input costs of local authorities and Registered Social Landlords
The methodology for the compilation of these index series is discussed later in the report.
1.5 Sources of data
The principal sources of data used for the project are the Department of Trade and Industry (DTI), Building Cost Information Service (BCIS), Building Maintenance Information (BMI) and the Scottish Executive (SE) itself, as well as national sources such as the Office for National Statistics (ONS). Most of the data relevant to public sector housing, refurbishment and maintenance work is derived from UK sourced information but Scotland-specific data has been used wherever possible.
The published index series examined are listed in Appendix A under the headings of Capital Costs, Maintenance Costs, Tender Prices, Output Prices and Management Costs.
1.6 Time frame
The study relies in most instances on existing, published sources of data. In most cases, data has been examined from 1985 onwards. 1985 was chosen as the base date for the analysis for two reasons: firstly, it is sufficiently far in the past to allow long term trends to be drawn and secondly, the UK economy was considered to be in a 'steady state equilibrium' at that point in time. In addition, this provides an examination of trends covering a 17 year period, which would normally encompass two of the traditionally regarded 7-9 year economic cycles.
For most comparisons, average annual percentage figures have been calculated for the whole period 1985-2002 but also covering the following time periods:
1985 - 1992
1992 - 1997
1997 - 2002
The first period covers the boom and slump experienced by the construction industry in the late 1980's, the second period steady growth from the trough of that cycle and the third the latest period that has experienced high wage inflation.
These key statistics are summarized in tables adjacent to the graphs giving the Scottish Executive a series of simple tools to aid consideration of future price and cost trends.
In most cases, figures for the second half of 2002 are still provisional: when these are firmed, some changes could occur in the average annual percentages observed but these are unlikely to be significant.
In this report, all the trends and charts are based on annual average figures as this provides smoother trend lines than quarterly index figures. However, where quarterly observations provide clearer understanding, this has been commented on.
1.7 Real costs
The Research Specification called for the examination of trends in 'real' costs and prices under each of the headings of Capital Costs, Maintenance Costs, Tender Prices, Output Prices and Management Costs.
Real terms are defined by HM Treasury as 'figures that have been adjusted for changes in the purchasing power of money'. To make this adjustment the GDP Deflator has been used rather than the Retail Prices Index. The former was chosen as it is considered more appropriate: being a measure of the movement in prices of UK inputs into the economy, it has a wider coverage than the RPI, which relates more specifically to price movements of goods and services purchased for consumption by households. The GDP Deflator is that published by the Office for National Statistics and relates to inflation in the UK as a whole.
A comparison between RPI and the GDP Deflator is considered in Appendix B. This found that over the longer term there was very little difference between the choice of inflation measure suggesting that inflation across the economy as a whole is broadly similar to inflation measured in the 'basket of goods' whose prices are measured by the RPI.
« Previous | Contents | Next »