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ANALYSIS OF HISTORICAL CONSTRUCTION COST MOVEMENTS IN SCOTTISH SOCIAL HOUSING FINAL REPORT

4.0 TENDER PRICES

4.1 Introduction

Tender price indices measure the price of construction work charged by contractors. Based on the study objectives, this is the most important index used, as it tracks the costs that will be directly incurred by local authorities and housing associations when carrying out the construction work necessary to fulfil the investment needs of Scotland's social housing stock. As well as changes in basic labour, materials and plant costs (as tracked by Capital and Maintenance costs indices) tender price indices reflect market conditions. Price indices include contractors' overheads and profit and the real costs of labour, plant and materials that the contractor is seeking to recover through the tender. The price index also includes changes in productivity, assuming that similar construction solutions are specified on projects used to generate the index.

The data for the trends examined in the Detailed Report have been sourced from:-

• Department of Trade and Industry (DTI)
• Scottish Executive (SE)
• Building Cost Information Service (BCIS)

Tender price indices in the UK are generally derived by comparing rates in tender documents with a base schedule. The DTI's Tender Price Index of Public Sector Building: Non-Housing (PUBSEC), the BCIS series of tender price indices and the Scottish Executive Building Division's Scottish Public Sector Tender Price Index and Housing Tender Price Index are calculated on the basis of a minimum 25% value sample of items, weighted in accordance with their proportional value. DTI's Tender Price Index of Social Housebuilding (TPISH), prior to 2001 was compiled by comparing the rates of a sample of defined key items with a base schedule; since 2001 the index has been based on rates per m2 for different house types, including adjustment factors for complexity and specification.

Throughout this chapter, as elsewhere, all observed trends relate to movements in real terms, changes in nominal indices deflated by the GDP Deflator as indicated in section 1.7.

4.2 Department of Trade and Industry

Tender price index series compiled and published by the DTI include:

Tender Price Index of Public Sector Building: Non-Housing - PUBSEC

The PUBSEC index is a UK index which excludes Housing, Civil Engineering, Mechanical Engineering, Electrical Engineering and minor alteration works. The Scottish Executive's Building Division contributes on a quarterly basis data from Scottish non-housing public sector projects to DTI for inclusion in the PUBSEC index.

Regional location factors (including Scotland) are published in conjunction with PUBSEC, enabling regional trends to be derived.

PUBSEC will be compared to housing specific indices in this study to compare changes in tender prices in the housing and non-housing sectors. This analysis will help to determine the extent to which trends identified in non-housing data can be extrapolated to the social housing sector.

Tender Price Index of Social Housebuilding - TPISH

The TPISH index relates to housing in England and Wales and includes the prices of simple building services installations. Data from Scotland is not included in this sample.

TPISH superseded the Price Index of Public Sector Housebuilding (PIPSH), which itself superseded the Price Index of Local Authority Housebuilding (PILAH) in 1979. PILAH was based on local authority housing excluding Greater London. PIPSH widened the coverage to include contracts let by London boroughs, GLC, new towns and housing associations and widened the sample to include three and four storey blocks. No data from Scotland was included in either of these index series.

Regional location factors are published in conjunction with TPISH, enabling regional trends to be derived. A derived Rehabilitation index is also published.

4.2.1 Housing and non-housing

Chart 4.1 compares the movement of housing and non-housing tender prices from 1985, as recorded by GDP deflated TPISH and PUBSEC. Both index series depict a pattern of price movement that is closely influenced by the volume of workload within the industry.

Tender prices rose sharply between 1986 and 1989 as construction output rose at an unprecedented pace, with labour shortages driving up prices through increased site bonuses and day-labour rates for the self-employed. At the same time, materials manufacturers and merchants were able to increase prices to improve their short-term profitability, while some clients and contractors were willing to pay a premium to secure materials ahead of others.

Chart 4.1 DTI Non-housing and Social Housebuilding Tender Price Indices

The construction 'bubble' burst in 1989 and workload dried up almost as fast at it had risen over the previous three years. Prices were cut to secure work, self-employed labour rates fell sharply and many contractors and sub-contractors went out of business. The chart shows that prices for non-housing work fell more severely than for housing work until conditions improved in 1992.

Since 1992, the UK construction industry has experienced generally buoyant conditions, except for a mini-slump in 1996. Real price increases for housing and non-housing work have been almost identical, the former rising by 28.1% and the latter by 27.6%, since 1992.

Between the base date of 1985 and 2002, the DTI index series show that non-housing tender prices fell by 10.3% in real terms while social housebuilding prices rose by 4.5%. Between the peak in 1989 and the current high (2002), the non-housing tender price index has fallen by 16.8%, while prices for social housing work have fallen by 6.4% in real terms. Over the same time period, resource costs (excluding any market place elements) rose by 5.2% for non-housing work and by 7.0% for house building in real terms. Over the longer time frame since 1985, non-housing basic costs rose by 5.1% and housing basic costs by 3.2% in real terms.

Over the complete study period therefore, the margin between notional cost changes and real tender prices has been much wider for non-housing work than for housebuilding. This may be indicative of a lower level of competition in the social housing sector during the period of the early 1990's slump but conditions in the two sectors appear to have been similar over the last decade.

The relationship between input costs and tender prices is complex. The analysis of input costs has shown that these have increased steadily over the study period, showing no relationship with the economic cycle, except for the strong influence of labour costs. On the other hand, tender prices are very sensitive to economic conditions, rising faster than background inflation when demand is high but dropping away quickly when demand falls.

Table 4.1 shows that input costs and tender prices in the social housing sector have increased at a much more consistent rate than in the non-housing sector when aggregated over the study period, although there have been substantial differential movements during that time.

Table 4.1 Comparison of real housing and non-housing tender price trends over the study period

The PUBSEC index, which represents the wider construction industry, has lagged TPISH over the entire study period, though the majority of the differential occurred between 1988 and 1992. This is likely to have been a reflection of higher levels of competition, improved productivity and the ability of large contractors to exert market pressure to pass on costs to sub-contractors in the non-housing sector, rather than any less strong influence of input costs on contractors' pricing.

TPISH includes no representation from the Scottish market whereas PUBSEC does: this may have an effect on the observed trends (see Charts 4.6 and 4.7) but, as the sample of Scottish projects within PUBSEC is typically no more than about 15%, the effect of this factor alone will be relatively small and the observations above on the differential trends between housing and non-housing prices remain valid.

From this analysis it can be suggested that social housing construction, typically undertaken by smaller contractors, is less susceptible to fluctuations in workload than general contracting and that tender prices post 1989 suggest that the level of competition for this workload is less severe and that there have been less marked improvements in productivity.

Based on this analysis, although trends have been broadly similar over the last decade, the long term pattern suggests that, within the context of this study, housing derived indices should be used as the tender metric; in the long term it should be anticipated that tender prices are likely to match building costs although limited short term fluctuations related to workload may need to be accounted for on a project by project basis.

The differential trends between building costs and tender prices recorded between 1992 and 2002 indicate the higher than average tender rates that can be anticipated in a rising market but the period 1989 to 1992 illustrates how the reverse can be true in a falling market.

4.2.2 Rehabilitation

Alongside the Tender Price Index of Social House Building (TPISH), the DTI also compile a 'Derived Rehab Index'. The construction of the Derived Rehab Index is not described by the DTI but a graphical representation of the two index series for the most part identifies little or no difference in the patterns of movement (Chart 4.2).

However the overall increase over the study period is slightly higher for the Rehab index than for the new build with the clearest margin of difference occurring post 1999. There is also a slightly discernible greater rate of increase in Rehab work between 1992 and 1994. Both these periods of time relate to periods when the construction industry was in expansionary phases and the volume of work available to contractors was such that contractors could be more discerning in their pricing of work, placing a premium on less attractive work such as refurbishment. This is more clearly demonstrated in Charts 4.3 and 4.4.

The evidence suggests that the price movement of new build housing and rehabilitation work to housing is very similar but in buoyant industry times refurbishment work may be less attractive and incur a price premium.

Chart 4.2 Tender Price Index of Social House Building - New Build and Derived Rehab

Chart 4.3 Comparison of TPISH New Build and TPISH Derived Rehab Index Series - Year on Year Percentage Changes

Chart 4.4 TPISH New Build and TPISH Derived Rehab Index Series - Annual Percentage Change Net Differences (Rehab - New Build)

4.2.3 Scotland

DTI publishes a series of regional location factors derived from the analysis of raw data used to compile the PUBSEC index. Factors are published each quarter alongside the main index. The factors are derived from information from projects over the most recent three year period. As a result, there is effectively an 18 month time lag in the applicability of the location factors.

Factors published for Scotland have been applied to the main PUBSEC index in an attempt to derive an index which is more applicable to Scotland than the Great Britain average represented by the published index. For comparison purposes the factor for the North Region was also considered as this region often exhibits similar economic behaviour to Scotland (Chart 4.5).

The resultant trend lines closely follow the pattern of the principal PUBSEC index. However, the trend shows that prices in neither Scotland nor the North peaked quite as high in 1988 as Great Britain as a whole and that the subsequent fall from then until 1992/93 was similarly not so deep. All three index series have shown an overall decline (by 9.7 to 11.0%) over the study period.

Location factors for Scotland and the North are virtually the same in 2002 as in 1985, which suggests that relative price levels in the two regions have, over the whole period from 1985, remained in step with Great Britain as a whole. The 'amplitude' of the Scottish cycle is lower than UK but the resulting change over time is similar. This pattern is common to many economic statistics in Scotland.

Chart 4.5 Tender Price Index of Public Sector Building adjusted for Scotland and the North

DTI also publish location factors associated with TPISH, similar to the factors associated with PUBSEC. Because TPISH covers only England and Wales, there is no location factor published for Scotland. However, factors published in association with PUBSEC and TPISH for the North are very similar and on this basis it is reasonable to apply the Scottish location factor for PUBSEC to TPISH to derive a regional index value. The resultant index is considered in the comparison of index series in section 4.5.8.

4.3 Scottish Executive

4.3.1 Non-housing

The Building Division of the Scottish Executive compile a separate Scottish Public Sector Tender Price Index (SPSTPI) for internal use. It is not externally published. SPSTPI measures the movement of prices for public sector building work (both housing and non-housing) throughout the Scottish mainland. The index uses similar methodology to the DTI's PUBSEC index. Since the first quarter of 1998, the index has been constructed using a statistical method to insulate against the effects of erratic short term changes but which does not interfere with responding to genuine changes in price levels.

Chart 4.6 Public Sector Building and Scottish Public Sector Tender Price Indices

Chart 4.6 plots this index against the DTI's PUBSEC index and the PUBSEC index adjusted by its Scotland location factor. STSTPI follows the same overall trend but with a later, and far less pronounced, fall after the late 1980's boom. The PUBSEC index has fallen in real terms over the study period by 10% but the STSPTI has fallen by only 5%. Over the last five years, during the period of buoyant construction workload, both index series have seen real price increases of 15 to 16% (or 2.8 to 3.0% per annum), with the increase in the Scottish index fractionally exceeding that of the DTI. This is slightly surprising given that the increase in workload in Scotland has been much less marked than in Great Britain as a whole over this period (see Chapter 10). Prices, however, have still not recovered to 1985 levels.

The graph illustrates how the PUBSEC index, adjusted by its Scotland location factors, moves away from the trend of the Great Britain index towards the line of the SPSTPI but only to a small degree. The SPSTPI, in spite of a smaller sample and hence greater volatility (on a quarterly basis), would appear to be the better measure of price change for Scotland.

4.3.2 Housing

The Building Division also compile a separate Housing Tender Price Index (HTPI) measuring the movement of tender prices for public sector housing throughout the Scottish mainland. This index is also constructed using a statistical method to insulate against the effects of erratic short term changes without interfering with the response to genuine changes in price levels.

As the SPSTPI, the quarterly HTPI is not published externally but annual figures are published in Scottish Executive Statistical Bulletin Housing Series.

Chart 4.7 UK and Scottish Measures of Social Housing Tender Price Change

Chart 4.7 plots this index against the DTI's TPISH index to compare price movement in Scotland with that in England and Wales for new build social housing. The trend lines, influenced by the peaks and troughs of general construction workload, are broadly similar throughout the study period. The HTPI trend line is slightly more volatile when viewed on a quarter by quarter basis (though barely discernible on an annual basis in Chart 4.7), which is probably the result of having been compiled from a much smaller sample.

However, over the 17 years, the Scottish index has shown an overall real price reduction of 4.2% while the index for England and Wales has risen by 4.5%. Since 1997, when both index series started to rise ahead of underlying inflation in response to workload pressures, the Scottish measure has increased by 17.1% (3.2% per annum) in real terms while prices for housebuilding in England and Wales have risen slightly more at 20.3% (3.8% per annum). This level of growth, however, is unlikely to persist in the long term

4.4 Building Cost Information Service

4.4.1 Introduction

BCIS publish a large number of tender price index series which measure the trend of contractors' pricing levels in accepted tenders.

The series of indices compiled by BCIS and examined in detail during this study are listed in Appendix A.

The principal series identified as most pertinent to this study are:

Covers new building work across the UK and includes work from all sectors including public sector, private sector and housing work

A subset of the 'All-in' index covering non-housing schemes for public sector clients including central and local government, health trusts etc.

Based on trends for housing schemes from throughout the UK. The majority of schemes in the sample relate to social housing.

Based on a specially selected sample of conversion and refurbishment projects. Further broken down into:

Separate index series for each UK economic planning region, Wales and Scotland.

4.4.2 Housing and non-housing

The principal index is the BCIS 'All-in' Tender Price Index. This covers new building work across the UK and includes work from all sectors including public sector, private sector and housing work. The index is based on a random sample of tender documents collected from their membership throughout the UK for new building work over 100,000 in value, with a current average contract value of around 1m. It is representative of broad trends in general contracting and is based on a substantial number of projects - typically 60 or 70 per quarter.

The BCIS TPI is subdivided into sub-indices representing different sources of workload and geographic locations. As these indices are based on a subset of the original sample of 60+ projects, the trends of these index series tend to be more volatile on a quarterly basis. However this volatility is less apparent when considering figures on an annual basis.

One of these index series is the Housing Tender Price Index. This is based on housing schemes from throughout the U.K. The vast majority of schemes in the sample relate to social housing. In the 1980's the index had an annual sample in the 90's; through the 1990's the sample gradually declined and, by 2001, the sample had fallen to 24 schemes. This was largely a reflection of a change in procurement, away from the use of traditional Bills of Quantities, generally towards design and build.

Chart 4.8 plots the movement of the BCIS 'All-in' Tender Price Index with the BCIS Housing Tender Price Index (deflated to represent real price changes) to assess differing trends in the particular market place. The chart illustrates a very close correlation between the two index series throughout the study period.

This contrasts with the differences between PUBSEC and TPISH discussed in the preceding section. A more detailed analysis has shown that the BCIS Housing index fell more than TPISH during the 1989-1992 slump, but thereafter, trends have been similar. However, overall, housing tender price inflation measured by BCIS is lower than that recorded by TPISH.

Chart 4.8 BCIS 'All-in' and Housing Tender Price Indices

4.4.3 Public and private sectors

Separate index series are compiled and published for Public Sector and Private Sector work, both excluding housing.

Chart 4.9 plots these two series to investigate whether there are any clear differing trends over time between the two sectors.

The chart illustrates how real tender prices for private sector work increased at a faster rate than public sector work between 1985 and 1988/89 and again since 1996, both periods in response to a greater increase in the volume of work in the private sector than in the public sector. In 2001 and 2002 year on year percentage change figures show that the public sector grew at a sharply faster rate than the private sector: a matching increase in the rate of price change is not reflected in the chart but this could be because the private sector nevertheless continued to demand more of an industry that had already grown rapidly in the preceding five years: between 1995 and 2000 construction output in the private commercial sector (in Great Britain) grew by 68% while public non-housing work declined by 13%.

Chart 4.9 BCIS Public and Private Sector Tender Price Indices

4.4.4 South versus North

A further split is made of the BCIS 'All-in' Tender Price Index, into the 'Southern and Eastern Sample' index and the 'Rest of the UK Sample' index (which includes Scotland), effectively dividing Great Britain into two, enabling a study of any differences in general trends.

Comparing the two index series between 1985 and 2002 reveals (Chart 4.10):

• between 1985 and 1992 the trend line of the South increased and subsequently fell at a faster rate than the North (during the late 1980's boom/bust cycle)
• between 1993 and 1997 the inflation rates are consistent
• post 1997 there has been higher tender price inflation in the South
• over the long term (1985 to 2002) real tender price changes have been broadly equal across the UK.

Chart 4.10 Comparison between BCIS Southern and Eastern and Rest of UK Sample Index Series

4.4.5 Refurbishment

The principal BCIS tender price index is based on a random sample of new build work. BCIS also specifically collect a separate sample of schemes for works of conversion and refurbishment covering the UK, which includes both public and private work, including housing. However, this index series has only been compiled since 1991.

Chart 4.11 plots the trend of the BCIS Refurbishment Tender Price Index with the principal New Build Index from 1991 (both deflated to reflect real change). On a quarterly basis, the refurbishment index displays considerable volatility, related to the smaller sample, but overall (and on an annual basis) the trend line is similar to the All-in Index.

There is a clear indication of an increasing rate of real tender price growth in the refurbishment index during periods of strong industry activity. This reflects the fact that contractors may find refurbishment work less attractive in buoyant times when there is a choice between new build and refurbishment work and price their tenders accordingly. This is more graphically represented in Charts 4.12 and 4.13.

Chart 4.11 BCIS Refurbishment Tender Price Index and New Build Tender Price Index

It should be noted that, as the Refurbishment Index has only been compiled since 1991, this examination is only looking at what has been a fairly continuous period of growth for the industry and does not reveal what happened to refurbishment prices during the industry slump after 1989.

In summary, this comparison reveals:

• overall trends for new build and refurbishment work are similar
• indications of higher than trend rates of tender price growth during periods of generally rising prices e.g. 1994-1995, 1999-2002 (with corresponding lower rates of growth or longer real falls when workload eases)
• contractors may find refurbishment work less attractive in buoyant times when there is a choice between new build and refurbishment work

Chart 4.12 Comparison between BCIS 'All-in' (New Build) and Refurbishment Tender Price Index Series - Annual Percentage Changes

Chart 4.13 BCIS 'All-in' (New Build) and Refurbishment Tender Price Index Series - Net Difference in Annual Percentage Changes (Refurbishment - New Build)

BCIS compile sub-sets of the Refurbishment Tender Price Index for housing and non-housing work. Although suffering from small samples, there appears to be little difference in price movement between the two sectors.

4.4.6 Scotland

BCIS produce a separate series of regional tender price indices. These are derived from the All-in Tender Price Index rather than being a truly independent set of index series.

Regional trends are calculated to show the differential movement between each region's tender levels and the national trend. These regional trends are based on very small sample sizes and are extremely volatile. The regional trends are processed using a Bayesian 'steady' model ¹, which assumes that there are no trends in regional factors, only a 'drift' in level which may accumulate. The resulting smoothed regional trend series is applied to a national tender index to give the regional index.

This technique gives an index series that indicates the broad movement in tender prices in a particular region but, due to the small sample size, sudden or short term changes in local tender levels will not be reflected in the indices.

Chart 4.14 plots the Regional Index for Scotland with the BCIS All-in Tender price Index to examine differences identified. The Regional Index for the North is also included for comparison. (All index series have been deflated to reflect real price changes)

This graph shows that the increase in tender prices in the late 1980's was less steep in Scotland than both the national average and the North of England and the subsequent decline between 1989 and 1993 less marked, confirming the PUBSEC/SPSTPI observation. It also shows that price increases over the last two years have been similarly below the trends of both the national average and the North of England. As a general trend, the indices suggest that tender price movement in Scotland follows the national pattern but with a lower amplitude in both upward and downward directions. All three index series remain below real 1985 price levels.

Chart 4.14 BCIS Regional Tender Price Indices

4.5 Conclusions

4.5.1 Consistency of trends over the study period

All of the index series examined display the same general trend i.e. real tender prices rising sharply between 1986 and 1989, falling even more markedly between 1989 and 1992/93, rising ahead of inflation again between 1993 and 1995 and accelerating further in 2000 to 2002. These distinct patterns of real price rises and falls are shown to relate directly to the volume of construction work in the industry and indicate, historically, the highly cyclical nature of the construction business.

4.5.2 Differentials between housing and non-housing work

The UK tender price index series published by DTI shows that over the entire period from 1985 to 2002, the tender prices of public sector non-housing work in real terms has fallen by 10% (an average of 0.6% per annum) ( Chart 4.1) . DTI figures show that tender prices for social housing work have risen by 4% in total (an average of 0.3% per annum) during this period. However, since 1992 price change in the two sectors has been almost identical.

Alternative UK indices published by BCIS show that average tender prices for public and private sector work (including both housing and non-housing) have fallen by 2% over the 17 year period (an average of -0.1% per annum) (Chart 4.8). These indices also show that tender prices for housing work only (largely social housing) have fallen by 4% (an average of -0.3% per annum) over the same 17 year period.

Comparative figures compiled by the Scottish Executive show that real prices for public sector work generally have declined by 5% (an average of -0.3% per annum) (Chart 4.6) over the period, while social housing tender prices in Scotland have declined marginally less at 4% (-0.3% per annum) (Chart 4.7).

BCIS and Scottish Executive data show similar overall trends between the housing and non-housing sectors while DTI data shows considerable divergence but only during the first part of the study period.

4.5.3 Differentials between public and private sectors

The BCIS All-in Tender Price Index largely matched the DTI's PUBSEC index between 1985 and 1995 but has increased at a faster rate since 1996, reflecting a greater buoyancy in the private sector over this period. BCIS' public sector only index shows a fall of 6% over the 1985 to 2002 period (an average of -0.4% per annum) (Chart 4.9), while the DTI's PUBSEC index has declined by 10% (-0.6% per annum) (Chart 4.1). BCIS private sector only index shows an increase of 1.6% (0.1% per annum) over the whole period.

4.5.4 Tender price trends for housing work

The U.K. index series specific to new housing work, DTI's TPISH and BCIS' Housing Tender Price Index, have followed the same pattern over time but the former declined less during the post 1988 downturn in the UK house building market. This has led to the varying whole period results indicated in paragraph 4.5.2. These two series employ a different method of calculation. This may explain the identified variation, however further investigation would be required to identify if this is the case. The Scottish Executive's HTPI has shown the same overall change as the BCIS Housing Tender Price index.

4.5.5 Derived indices for Scotland

DTI's PUBSEC index, which tracks changes in general UK construction tender prices, and which is not specific to any particular sector of the industry, plotted in conjunction with location factors published for Scotland, generated the same pattern of movement as the principal U.K. index but with weaker peaks and shallower troughs. An index plotted using a location factor for the North of England closely resembles that derived for Scotland.

BCIS' separate Regional Price Index for Scotland confirms the observation of a Scottish tender price movement broadly following the U.K. pattern but with a lower amplitude in both upward and downward directions. Between 1985 and 2002, the index shows a real price change of -10% (an average of -0.6% per annum) (Chart 4.14), compared to -2% (an average of -0.1% per annum) (Chart 4.8) for the principal U.K. index. This significant margin has largely opened up since 1997, since when the index series have shown a real price increase of 21% (3.9% per annum) for the U.K. and 12.5% (2.4% per annum) for Scotland. In the North of England a real price increase of 16% (3.0% per annum) has occurred.

4.5.6 Scottish Executive tender index series

The real price change indicated by the general tender price index compiled by the Scottish Executive lies between the figures indicated by the DTI and BCIS principal index series: the SPSTPI (Scottish public sector housing and non-housing work) shows a 5% fall over the whole 17-year period (average -0.3% per annum) (Chart 4.6). The Scottish Executive's housing-specific index (HTPI) concurs with the movement of the BCIS Housing Tender Price Index, showing a 4% fall over the period (average -0.3% per annum) (Chart 4.7).

4.5.7 Differentials between new and refurbishment work

Prices of refurbishment work across the UK (evidenced by the BCIS Refurbishment Tender Price Index and the DTI's Derived Rehab Index) have been shown to have moved generally in line with new build work throughout the 17-year period. However, a slight increase in refurbishment prices can be observed in times of buoyant workload (Charts 4.2 to 4.4 and 4.11 to 4.13).

Chart 4.15 compares the net differences between refurbishment and new build tender prices as observed in the DTI TPISH and BCIS index series.

The two sources of data, TPISH and BCIS, concur that a real price premium occurred for refurbishment work over new build work in 1993-94, 1996, 1999-2000 and 2002, at times of generally rising prices (except for 1996), with the premium for refurbishment work being up to 3% per annum.

Chart 4.15 Net Differences in Annual Percentage Changes between Real Refurbishment and New Build Tender Prices (Refurbishment - New Build)

4.5.8 Most appropriate indices

The DTI's TPISH index of housing tender prices, applicable to England and Wales, appears to be out of line with most other tender price index series. Therefore the Scottish Executive's HTPI is the tender index recommended as the most appropriate measure of tender price inflation relevant to Scottish social housing refurbishment work.

However the Scottish Executive's Housing Tender Price Index is published only on an annual basis in Scottish Executive Statistical Bulletin Housing Series. In addition, the HTPI sample sizes are declining because the prime source of raw material, firm Bills of Quantities, are now less frequently used in procuring new social housebuilding schemes. Current procurement trends are unlikely to lead to any significant upturn in the foreseeable future. For these reasons, other index series have been examined to determine the closest historical proxy to HTPI.

The BCIS Housing Tender Price Index, based on a sample of housing schemes from throughout the UK, shows a virtually identical real change (-4%) over the 17 year period (average -0.3% per annum), though the order of magnitude of intervening changes has tended to be lower in Scotland. The relationship is illustrated in Chart 4.16. As a published index, the BCIS Housing Tender Price Index may be regarded as a reasonable historical proxy for the Scottish Housing Tender Price Index.

Chart 4.16 BCIS Housing Tender Price Index and Scottish Executive's Housing Tender Price Index compared

However, sample numbers for the BCIS Housing Tender Price Index have been in single figures since mid 2000 and the latest figure published is for the 1 ^st Quarter 2002. For a similar reason to that outlined in the previous but one paragraph concerning HTPI, it seems likely that very small samples (or none at all) will continue into the future for the BCIS index as the methodology relies on the analysis of rates in Bills of Quantities. Competitive tenders using Bills of Quantities are now rarely used in the social housing procurement market.

Chart 4.17 plots the real price change since 1985 of all the principal published (or derived from published data) tender price index series considered, to compare the trends with the Scottish Executive's Housing Tender Price Index (shown in bold).

Statistically, the series with the closest correlation to HTPI is the BCIS Regional Tender Price Index for Scotland. The correlation coefficient between HTPI and each index series is shown in Table 4.2.

Chart 4.17 Tender Price Index Series Compared

Table 4.2 Correlation Coefficients to HTPI

Chart 4.18 identifies the series with the best and worst correlation coefficients to HTPI.

Chart 4.18 Best and Worst Correlation Coefficients to HTPI

The BCIS Regional Tender Price Index for Scotland achieves the best correlation because it successfully mimics the changes in direction of HTPI. The TPISH Derived Rehab index (with applied location factors for Scotland derived from PUBSEC) may have been expected to have produced a closer correlation but in fact has the worst correlation coefficient to HTPI. TPISH (New Build) with an adjustment for Scotland produces the second worst correlation.

The BCIS Regional Tender Price Index for Scotland has the best statistical correlation but has understated the degree of inflation relative to HTPI over much of the study period. In addition it has been demonstrated that refurbishment work is likely to have attracted higher inflation during periods of busy workload.

Consequently, after the HTPI, the most suitable published Tender Price Index reflecting price movement of Scottish social housing refurbishment may, on observation, be the DTI's Tender Price Index of Social Housebuilding Derived Rehab Index (Chart 4.19).

However the TPISH Derived Rehab index is currently displaying the highest rise since 1985 of all of the tender index series examined (+9.5%) and almost certainly overstates the increase that has occurred post 1999 in Scottish social housing refurbishment costs. The TPISH index series are based on data from England and Wales and construction growth in England and Wales has been increasing steadily since 1995 with a sharp rise in 2002. In Scotland the pattern of construction expenditure has been more erratic with strong growth in 2000 but falling back since: in Scotland total construction expenditure (in real terms) in 2002 was just 0.3% higher than in 1995; in Great Britain as a whole, construction spending last year was 23% higher than in 1995. (See Chapter 10)

Chart 4.19 Tender Price Index Series Most Closely Reflecting HTPI

Examination has also been undertaken of trends over the last ten years only (i.e. ignoring the boom and slump of the late 1980's / early 1990's and studying movements from the 1993 trough). Chart 4.20 plots all of the main tender price index series, deflated to reflect real price change, from a base date of 1993.

Chart 4.20 Tender Price Index Series Compared 1993-2002

Chart 4.21 plots the same graph, displaying the four series with the closest correlation to HTPI (see Table 4.2) - DTI's TPISH with location factors for Scotland, DTI's PUBSEC index with location factors for Scotland, DTI's TPISH Derived Rehab index with location factors for Scotland and BCIS Regional Tender Price Index - Scotland.

Chart 4.21 Tender Price Index Series Closely Matching HTPI

The DTI's TPISH index with Scotland location factors applied is actually the index with the closest correlation coefficient to HTPI over this period, though its directional change in 1994/95 did not coincide. Post 2000, it has shown a higher rate of real increase than HTPI, though this may be desirable following the observations regarding premiums for refurbishment work when construction activity is plentiful.

Almost as good statistically is the DTI's PUBSEC index with Scotland location factors applied. This index matches the direction changes but smooths out the dip in prices shown by HTPI in 1997 and also shows a significantly higher rate of increase post 2000.

The TPISH Derived Rehab index with Scotland location factors applied is the third closest index statistically, though its directional changes do not coincide, until 2000 it generally displayed a lower rate of real increase than HTPI compared to the base date and post 2000, its rate of increase is the steepest of the four series considered. Over the longer term, 1985-2002, this index displayed the worst correlation of all the 11 index series considered.

All of the three closest correlation index series possess the disadvantage of not being simple published index series - each published index has been adjusted by a series of separately published location factors.

The fourth closest correlation index is the BCIS Regional Tender Price Index for Scotland, which was also the index with the closest fit over the longer term 1985-2002. This index turned positive in 1997 when HTPI experienced its sharpest decline but otherwise closely matched HTPI compared to the base over most of the period. Post 2000 it has increased faster than HTPI but not as sharply as the two TPISH index series and over ten years shows a real price increase just fractionally higher than HTPI.

On this basis, and on the longer term 1985-2002 basis, the BCIS Regional Tender Price Index for Scotland may be the best proxy for HTPI and the price movement of refurbishment work in Scottish social housing.

4.5.9 Summary

Tender prices appear to have remained stable (drifting downwards slightly overall) in real terms over the 17 year period, though with significant shorter term changes. The study has shown that, in the short term, real tender prices are cyclical, rising during periods of expansion and falling during periods of contraction. There have been relatively high increases in labour costs but tenderers have been able to obtain greater productivity from both their material and labour inputs, leading to fewer resources now being required to produce a given level of output than was previously the case.

Table 4.3 summarises the real price changes identified in the principal index series examined in this section of the report.

All of the index series display the same general trend of cyclical market driven ups and downs, which can be summarised thus:

In this chapter, and throughout the report generally, the movement of tender prices has been considered from a base date of 1985 and the average annual percentage change (in real terms) over the whole period to 2002 has ranged from -0.7% per annum to +0.5% per annum. Of the eleven index series in Table 4.3, three show a positive annual average figure while eight show a negative annual average figure.

Table 4.3 Summary of Tender Prices Index Series and Real Percentage Changes

Chart 4.22 plots annual average real percentage change each year back to 1964 for two of the principal index series, the DTI PUBSEC index and the BCIS All-in Tender Price index. None of the other index series extend back this far. The chart demonstrates that real tender prices have been in long term decline throughout most of this period and that average annual growth in real tender prices has only occurred in the latter period, 1991 to 2002, both index series concurring in this pattern of change.

Chart 4.22 Average Annual Percentage Change since 1964

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