1. We consulted the following organisations to identify information on construction cost increases in both the public and private sectors:
- HM Treasury;
- The Office of Government Commerce;
- The Office of National Statistics;
- Department of Trade and Industry;
- Department for Education and Skills;
- Department of Health;
- The Highways Agency;
- Royal Institute of Chartered Surveyors;
- The Construction Confederation;
- The Construction Industry Council;
- Davis Langdon, surveyors;
- The Major Contractors Group.
2. There are a number of different sources for measures of construction cost inflation in both the public and private sectors. A further complication is that measures of the rate of construction cost increase between different dates will be influenced not just by changes to the costs of labour and particular materials but also by changes in the type of building work undertaken.
3. The extent of construction cost inflation between 1998, when the Norfolk & Norwich University Hospital NHS Trust (the Trust) let its PFI contract, and 2005 identified by these different measures is set out in Figure 1.
Figure 1: Construction cost inflation
Indicator | Inflation1998-2005 | Source |
PFI Hospital building cost inflation The Department's estimate of the effect that construction cost inflation would have had on the Norfolk & Norwich hospital building costs | 64% | Note 1 |
Building cost inflation (public and private sector combined) Public and private sector building inflation on tenders including PFI | 60% | Note 2 |
Private sector building inflation Private sector building cost inflation on tenders | 65% | Note 3 |
Public sector Building Inflation Public sector building cost inflation on tenders | 56% | Note 4 |
including PFI Public sector building inflation on tenders excluding | 50% | Note 5 |
PFI (DTI) Public sector building inflation on tenders excluding PFI (NHS Estates) | 49% | Note 6 |
Other Inflation General building cost inflation relating to contract | 41% | Note 7 |
variations (public and private sectors) Maintenance cost inflation | 23% | Note 8 |
Retail price inflation | 19% | Note 9 |
Notes: | 1. The Norfolk & Norwich hospital PFI contract in 1998 was based upon building costs per square meter of £1,589. In summer 2005, the Department's information was that the building work for a PFI hospital outside London, comparable to the Norfolk & Norwich hospital, had been priced recently at £2,600 per square metre. That is equivalent to construction cost inflation of 64%. |
| 2. The Royal Institute of Chartered Surveyors through its Building Cost Information Service (BCIS) maintains indices on building costs. The BCIS All-in-Tender Price Index is based on a quarterly sample of 80 projects from both the public and private sectors. The RICS have included PFI projects in the compilation of the index, but they are too small in number to be representative of PFI projects in general. |
| 3. Royal Institute of Chartered Surveyors, BCIS Private Sector Tender Price Index of private sector building cost inflation. |
| 4. Royal Institute of Chartered Surveyors, BCIS Public Sector Tender Price Index of public sector building cost inflation. |
| 5. The Department of Trade and Industry compiles the public sector building (non-housing) tender price index based on the submission of priced bills of quantities. The principal contributors are NHS Trusts, Ministry of Defence, other Government departments and the Local Authorities of England, Scotland and Wales. |
| 6. The Median Index of Public Sector Tender Prices (MIPS) published by NHS Estates, based on information compiled by the Department of Trade and Industry of construction cost inflation in government building projects excluding PFI projects. |
| 7. Royal Institute of Chartered Surveyors Index of general building cost inflation. |
| 8. Royal Institute of Chartered Surveyors Building Maintenance Index. |
| 9. The Retail Prices Index. |
3. Heavy global demand for building materials combined with a relatively large supply of government building projects in the United Kingdom market have contributed to recent construction cost inflation. Since 1998 construction cost inflation has been 60%, more than three times the rate of retail price inflation. Construction cost inflation on private sector building projects has been higher than that experienced in the public sector.
4. Based on current pricing information from market sources, the Department estimates that construction cost inflation on its PFI deals has been in the range of 57 to 89% between 1998 and 2005. This wide range reflects the different types of PFI hospital projects being procured by the Department. The Department's range of PFI construction cost inflation is higher than the average public sector building inflation during this period of 56%. The Department has identified, however, that its costs have been influenced by improvements to patient environment and refurbishments of existing hospitals whose complexities resulted in higher costs per square metre than the early PFI projects which were mainly new builds.
5. Despite the various sources of data on construction cost inflation there are areas of uncertainty about the factors which have given rise to differences between the different measures. From our discussions with the organisations we have consulted it remains uncertain:
- to what extent the supply of government building projects, including those under the PFI, has contributed to construction cost inflation;
- why private sector construction cost inflation has been greater than public sector construction cost inflation during 1998 to 2005;
- the extent to which the information on PFI construction cost inflation provided by the Department of Health, based on market sources, is consistent with PFI experience in other areas of government. Neither the Treasury nor the individual departments we have consulted maintain detailed data on PFI construction cost inflation.