Building costs set to rocket

By JOHN ROBERTSON

BUILDING prices are poised to rocket in Shetland as the SIC seeks to push ahead with some of its delayed big projects.

A number of factors are combining now which could further inflate the estimated costs of the new Anderson High School, the Mareel music venue and cinema and the Mid Yell school.

Those projects, worth £60- £70 million, are still stuck on the stocks while other major works are about to kick off at Sullom Voe and Scatsta Airport. Further construction is planned by Scottish Water, Tesco and the Co-op and there is no sign of a slowdown in the high level of private and public house-building. The result could be that the council has to pay even more to get its projects done.

One industry source said this week: “There’s a feeling among the industry that there’s a whole heap of work just around the corner. I would say there’s getting to be a shortage of resources here and if all those big jobs come on I don’t know how it’s all going to work.”

Among the looming threats which spell spiralling project costs are:

• price quotes for jobs rising substantially because busy contractors won’t need to compete for more work;
• building trade wages possibly having to rise considerably with these major costs being passed on in higher tenders;
• already escalating prices for manufactured building materials like steel and glass due to the soaring cost of energy;
• extra costs on all materials being transported to Shetland due to the relentless fuel price rise which also means increased operating costs for all contractors;
• rising prices for the large amount of building materials, such as timber, imported from nations within the Eurozone where inflation is on the march and the British pound buys 20 per cent less than this time last year.

While employers can expect demands for higher pay anyway this year, due to the jump in the cost of living, building companies could come under much greater pressure to pay more if the new Anderson High does get under way next year (since 2008 now looks unlikely with not even a planning application ready).

Irish contractor O’Hare & McGovern is expected to use some mainland sub-contractors on the school if it can persuade them to work in Shetland. But local builders will feel the knock-on effect even if they do not gain work from the project. Wages for those working on the school are expected to be significantly higher, tempting workers away from local firms and forcing them to up their rates to keep their staff. One figure mentioned this week was a requirement for up to an extra £2 an hour for a tradesman.

When pricing for jobs, contractors have to factor in an estimate for expected extra costs and with such uncertainty over the oil price and inflation the extra could push tender prices up considerably.

One expert who was prepared to be quoted, valuer and quantity surveyor Stephen Johnston of David Adamson, said there appeared to a lot of work coming off over the next couple of years whereas two years ago there was keener competition because there was not a lot of large contracts around.

“It’s a substantial amount more work than was happening last year and the year before and at a time when raw materials and labour is going up and there are fears of more inflation on materials. It’s a tough time to be a con­tractor. Although I imagine profit levels will go up as well there’s more risk involved.”

He did not want to be alarmist about the future but said everything worked better when there was a steady flow of work coming through rather than a feast or a famine.

Recently there has been some calm before the storm with the industry having had one of its rare relatively quiet patches over the past two years while the SIC capital programme has been stalled. Among the giant schemes that were meant to happen during that period but didn’t were the Bressay bridge and the new AHS.

Things are now starting to change and head the opposite way even before the SIC adds its heavyweight projects to the list. Ironically the council project which could go ahead almost immediately if it gets the green light at the Full Council on Wednesday is Mareel.

DITT has a lucrative contract at Sullom Voe to run the concrete base for the terminal’s new West of Shetland gas plant. Across the water at Scatsta Airport a new hangar, terminal building and other improvements are about to be carried out.

Hjaltland Housing Association spent £6 million on new houses last year and although it will not be building nearly as many houses this year as it had hoped the SIC has an ambitious £13 million house-building scheme.

The feast or famine problem was echoed last week by SIC building services manager David Williamson in a report to councillors in which he said the number and scale of SIC projects caused high building costs.

He said: “The number of skilled workers in the local construction industry does not vary to any great extent but the demand for these skills does. These ‘peaks and troughs’ in demand tend to drive up prices. This is not just a local phenomenon; it applies nationally.”

Mr Johnston said it was very difficult to put a figure on the building inflation rate in Shetland but for an average-sized job valued at  £250,000 – £500,000 the cost had probably risen between six and 10 per cent over the past year.

Last week we reported it was running at 24 per cent above the general inflation rate here. It turns out that, while true, that figure was actually a national measurement of the cumulative difference between the inflation rates over the course of nine years.

In other words, the cost of putting up a building had not risen 24 per cent in a year.

For many years the rule-of-thumb formula used about building in Shetland was to add about one third to the equivalent contract on the Scottish mainland. One council source said that depending on where the building was going up in Shetland it might vary from 25-35 per cent more than down south due to the added transport and labour costs.

The problem of building costs rising faster than inflation was highlighted in a report on the difficulties endured by the council’s building maintenance team which has over 100 buildings to look after, including schools, colleges, office blocks, care centres and public toilets.

While inflation is increasing and the number of buildings on its list rises, the council team’s budget has been cut, leaving less money to pay for more work, all of which is becoming more expensive. The result is that low priority jobs do not get carried out because there is no money left. It also leads to more jobs being urgent, unplanned and inefficient repairs.

As well as higher material costs, stiffer environmental standards mean more expense in the building trade too with higher standards required and more rules about safe disposal of by-products.

The council’s team is also suffering dreadful morale among its craftsmen due to a pay rate which has fallen far below their colleagues in the private sector. According to Mr Williamson the same applies to his managers and technical staff with the result that skilled staff are quitting the council to work for private firms.

He said the only way the problem could be sorted was through the single status pay negotiations under which building and maintenance staff will be brought more into line with other workers.