Excessive cost inflation in construction sector key risk for 2019 – CSG

A Government-appointed expert group has warned about the impact of “excessive cost inflation” in the construction sector, which it describes as a “key risk” for 2019.

The report, from the public-private Construction Sector Group (CSG) also warns of the upward march of labour costs, an impending tightening in the supply of new workers, and the “major constraint” threatened by a lack of productivity growth in the sector.

The warnings are contained in the first report of the CSG, which is a high-level assembly of construction industry stakeholders and senior State officials set up to support delivery of the Government’s Project 2040 plan.

“A key concern is the risk of excessive cost inflation which may occur,” the report found.

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It warns that costs in the construction sector are on an upward march across the board, with average hourly earnings in construction increasing by 3.7 per cent in the 12 months to the end of the third quarter last year. Wholesale prices for building materials increased by 0.6 per cent.

The highest level of inflation is in the non-residential sector, with the construction tender price index estimated to have increased by 7.4 per cent in 2018.

It comes as unions representing construction workers are reportedly gearing up to make demands for pay rises of up to 12 per cent. The Sunday Business Post on Sunday reported that construction workers will on Monday tell the Labour Court that they want the pay increases over three years, alongside other improvements for the trade, such as a one-hour daily travelling allowance for every worker.

The pay increases are being opposed by the Construction Industry Federation, which has argued that the sector "cannot afford any further increases in labour costs. Driving up the cost of housing at this time would only serve to exacerbate the current housing crisis," the newspaper reported.

The CSG report also flags concerns about a tightening in labour supply for the construction sector. Pointing to the decline in unemployment and a significantly lower level of total workers engaged in the sector compared to the 2007 peak, it suggests that “the pool of available labour in the market may be in short supply”.

While there has been an increase in construction apprentice registrations this year, “new apprentice registrations in bricklaying and plastering remain subdued”. The report flags that the number of new entrants in building and civil engineering at third level was 43 per cent the 2009 level.

Average hourly earnings for construction employees increased by 6.4 per cent on an annual basis in Q4 2018 to stand at €21.43, the report found. Meanwhile, construction tender prices in 2018 are “expected to have returned close to the level of the previous peak in the first half of 2007”.

The CSG report warns that “another major constraint facing the Irish construction sector is the fact that productivity was largely stagnant over the period 2000 to 2016”. According to the authors, the level of labour productivity in Irish building is “well below the EU average for construction sectors, as well as being lower than other sectors of the Irish economy”.