Soaring costs see developers tread warily

The building business is a fickle business, says Paul Newman, developer and senior partner in auctioneers Douglas Newman Good. "Those taking the risks may decide that if building costs escalate any further, it may not be profitable or viable to build," he says.

He believes that those who have reaped the fruits of the property boom may decide to sit on land rather than risk losing out if potential problems emerge down the line. "Some may not want to speculate as building costs start to creep out of control. My concern is that next year we might have a situation where building costs will go up 12 to 15 per cent and house prices will go up less, which would make development unsustainable."

The value of housing land has taken a nose dive of between 20 and 30 per cent in the greater Dublin area, in no small part due to the Government's plan to take 20 per cent of all sites for social and affordable housing.

Ciaran Ryan of the Irish Home Builders Association has pointed to the uncertainty this has created amongst developers, who, he said, "do not know how the market will respond".

"It could be counter-productive, as developers are looking for the same return - their costs have not changed." According to Gerry Campbell, a partner in Bruce Shaw Partnership, the Government's 20 per cent stipulation is not the only factor affecting site values.

"At one time, for example, a developer could build apartments and the value of them would go up quicker than the cost of building them. Now building costs are rising faster than values."

Spiralling building costs have been fuelled largely by the chronic shortage of skilled manpower which has pushed labour costs and tendering prices skywards. The PKS Annual Review 2000 predicts the volume of new construction will increase by 10 per cent this year across all sectors of the industry, reducing to 8 per cent in 2001 and 5 per cent in 2002 and 2003 - this takes into account resource problems and planning delays associated with major infrastructure projects.

According to the Society of Chartered Surveyors' Construction Cost Index, the cost of labour and materials rose by 8 per cent up to the summer of this year, while tender levels have increased at an even higher rate. In the first six months of 2000, the PKS index showed a rise of 10 per cent on June 1999 and the Bruce Shaw tender index is forecasting a 12-15 per cent rise in inflation for the year 2000. The average output of each construction worker grew from £48,700 in 1994 to £54,100 in 1999, according to the PKS Review.

Francis Rhattigan, chairman of the Irish Home Builders Association, says one solution would be to further improve the productivity of the workforce. A revised grading structure has been endorsed by the Labour Relations Commission. According to the Construction Industry Federation's pre-budget submission, "numbers in the industry will need to reach 200,000 over the next five years to deliver the demands of the National Development Plan".

Taking a serious approach to matters like health and safety can involve "big expenditure", says Mr Rhattigan. "The hope is that if you spend on health and safety, you might benefit in terms of efficiency. A safety manager might earn £50,000 a year, which is a serious cost, and there has to be compliance to modern health and safety standards." He also advocates a more efficient use of land in terms of "decent-sized developments and higher densities".

While residential construction accounts for 51 per cent of output, the building costs problem affects all sectors, including general contracting, which accounts for 30 per cent and includes industrial and commercial construction.

Brian O'Neill, director of architectural firm Anthony Reddy Associates, believes that the £40.6 billion National Development Plan 2000-2006 will be a drain on manpower resources, from the building construction sector to civil and infrastructure projects.

The solution, he says, could be to stagger some publicly-funded projects and bring in workers from abroad to supplement the Irish workforce in the construction industry.

Mr O'Neill says that while rising costs have not affected his company's workload, it could have some impact in the future.

"The quantity surveyors have experienced rising tender returns recently from the market, which, coupled with projected construction inflation figures fluctuating anywhere between 8 and 14 per cent, has meant that budget forecasting is a precarious business."

Building material costs have also soared - a 6.2 per cent year on year increase in inflation has been recorded. The strength of sterling has pushed up the prices of tarmacadam, sand, gravel and metal imported from the UK.

Designers are now looking at ways to cut back on the amount of blockwork and brickwork in new buildings by using more partitions. Timber housing is becoming increasingly popular. Other more peripheral costs have made some impact. "Delivery delays due to snarl-ups in traffic are another cost factor," says Mr Rhattigan.

The Government has no choice but to become involved, says Mr Newman.

"If the situation gets out of hand, it is not compulsory to build and that goes against the Government policy to build more houses. We need to train more apprentices, make the construction industry a more attractive proposition for school leavers," he says.

"And we need Government investment in training," adds Mr Rhattigan.

"They put huge resources into the IT sector and it worked well. In the 1980s, a lot of people got out of the industry due to the recession. We are paying the price for that now, so we have to keep the treadmill going and bring in fast-track apprentice schemes."