Shortages of skilled labour and materials are becoming more apparent as market comes out of downturn

Office occupiers look set to be hit by spiralling costs when fitting out buildings, with tender prices predicted to rise at an annual rate of up to 6.5% over the next two years, new research suggests.

Surging demand for fit-out contractors and materials, after years of relatively low activity, has led to a mismatch in supply and demand which is now starting to show itself in rapidly increasing costs.

Research by consultancy Turner & Townsend, which focused on the cost of category-B fit-outs in the London office market, found tender price inflation will hit 4% this year, rising to 6% next year and 6.5% by 2016.

Demand for fit-out contractors is being fuelled not only by increased levels of confidence in the occupier market but by rising sustainability standards that have forced landlords to look at upgrading their property portfolios.

Paul Nash, director at Turner & Townsend, says that rising demand, alongside shortages of skilled labour and materials, will have serious implications for office occupiers. “I don’t think I’ve ever been in a place where I’ve seen the capacity of the market reduced so significantly,” he says.

While a certain level of inflation would be expected after a long economic downturn, Turner & Townsend’s research suggests prices attached to labour in specialist areas, such as carpet installation, could rise
by as much as 10%. Other trades are also likely to see price inflation, in some cases driven by increased activity in construction-related sectors such as infrastructure and energy which are now competing for labour.

Availability of materials is another factor in spiralling costs. Most suppliers dramatically reduced their capacity during the recession and are reluctant to ramp up their activity for fear of demand dropping off again. Global demand is also an issue, with prices of copper for power networks rising in part due to demand from international markets such as China.

But Nash says the fit-out market was most likely to be hit disproportionately by rising prices due to its reliance on specialist trades such as joiners. “A lot of major contractors and subcontractors cut back on their training and apprenticeship schemes during the recession. We have a significant problem in terms of skills. Suddenly people can start demanding higher wages.”

Nash warns that inflation could continue to rise way beyond 2016 if action is not taken now to plug the skills gap. Just as suppliers are wary of increasing levels of production, employers have been slow to reinvest
in apprenticeships and training.

Even if these sorts of schemes are reintroduced now, there will be a lag while supply catches up with demand. “It takes time to properly train an apprentice,” says Nash. “It’s not something you can shortcut. This action really needed to be taken two or three years ago.”

While rising tender prices are the key focus of concern, there may also be a looming issue in terms of quality of work carried out as the fit-out industry struggles to keep pace with demand. Nash has concerns about falling standards.

“The risk is that people try to scale up very quickly and respond to demand,” he says. “Lots of companies will be rubbing their hands together, seeing it as an opportunity. There’s an issue around quality and health and safety — that’s a statistic we need to watch very carefully.”

Nash suggests that the issue may require public intervention to resolve, calling on the government to work with the construction industry to increase the supply of skilled labour. “Undoubtedly the government has to do something,” he says.

“What I would really like to see is some sort of investment in apprenticeships. But that also requires employers to take a long-term view.”

In the meantime, landlords and developers are advised to keep a close eye on costs and hold early discussions about prices and timescales with suppliers.

“My advice is to engage as early as possible with your supply chain,” says Nash. “It’s not a ‘nice-to-have’, it’s a ‘must-have’. Talk to suppliers and look at how the supply chain can affect the delivery time of a project. It could delay the programme with implications for capital costs. These are all factors that need to be considered.”

It’s a far cry from periods during the last few years when a handful of active developers were able to dictate the terms of their agreements with contractors. Nash adds: “It’s a very different landscape out there now.”