Construction tender prices are falling as a result of the spare capacity caused by the downturn in residential building. Yet costs, particularly for labour and materials, will continue to track inflation and put additional pressures on the sector, according to a review of the industry.

The Taoiseach Mr Ahern launched The 2008 Bruce Shaw Handbook last Wednesday in Ballsbridge. The handbook provides a wealth of information about the general construction sector. It notes the current difficulties faced in particular by residential developers, but suggests that the market will stabilise and return to growth by 2009.

Central to the changed fortunes of the sector overall is the slide in residential completions. A record 88,200 completions was reached in 2006, but the first 11 months of 2007 saw a decline to 71,598 units with estimates suggesting a final tally of about 75,000 units.

The 15 per cent year-on-year dip is significant given that new residential construction represented a whopping €19.5 billion, 55 per cent of the entire Irish construction output, the handbook states.

Things are unlikely to improve during 2008, according to the Bruce Shaw analysis. It estimates a total build of between 50,000 and 60,000 residential units for the year. "Unfortunately such a significant fall in the residential sector affects not only construction but the economy as a whole," it says.

This decline in activity has shoved additional construction capacity onto the market, in turn increasing competition between companies seeking to maintain levels of activity. This has served to depress tender prices for developers but also for the subcontractors delivering services to the marketplace.

As a result tender prices are now in decline for the first time since 2003, with prices virtually static during 2007, the report notes. "During 2008 it is likely that the increasing spare capacity within the industry will drive margins down further and Bruce Shaw is predicting a fall in tender prices of 2 per cent to 3 per cent on average," the analysis states.

Inflation will continue to do its worst, it adds, with costs of labour and materials continuing to climb at about 3 per cent per annum over the coming year. Labour costs have risen by 2.5 per cent since the New Year and the current national wage agreement will run out by the end of June, the report says.

It adds that anything dependent on oil, whether fuel or plastic materials, will face a higher rate of cost growth due to the continuing high cost of a barrel of oil. And due to its energy demand, steel prices are also likely to rise above the rate of inflation.

Bruce Shaw analysts remain optimistic about next year, however, by which time the market should have been able to adjust to the decline in residential new builds. It predicts that 65,000 residential units could be built during 2009 and, if this proves to be true, then both construction costs and tender prices will again match up, with rises of between 3 per cent and 4 per cent in 2009.

In the shorter term, there may be some relief coming from higher building activity in sectors away from residential. Uncertainty in the market generally is causing a more conservative approach from consumers who are looking for residential repair, improvement works and extensions. There was also good activity in 2007 in the office construction sector and for retail schemes and industrial projects, the Bruce Shaw report indicates. There could also be a fillip for the Irish construction industry if it benefits from the likely building boom associated with the London Olympics in 2012.

Copies of The 2008 Bruce Shaw Handbook are available by contacting the company directly through its offices in Dublin 01-6614711, Cork 021-4274474, or Limerick 061-493515.