A glance out the window today might not confirm high temperatures but the cranes will attest to how busy the London construction market is getting.

In fact, with so much activity, the capital has now become the third most expensive market in the world to build in.

Research from Turner & Townsend shows that the average construction cost for commercial and residential projects – which make up the lion’s share of work across the capital – stand at £2,430 per sq m, behind only New York (£2,500) and Zurich (£2,530).

Compare that to a city like Amsterdam, where comparable build costs are around £1,650, or even Beijing, where build costs have fallen by 10 per cent over the past year, where build costs are only £680 per sq m.

London may not be ‘overheating’ yet, according to Turner & Townsend, with the consultant placing it in the ‘hot’ category. This means that the capital has a plethora of projects and less competition for tenders, which in turn is driving up prices.

But the top line in all this for contractors is that margins still remain very tight.

On a medium-sized commercial scheme of around 5,000 sq m in London, T&T says a contractor could make an average margin of 5 per cent (which I would suggest most firms would bite their client’s hands off for) compared to around 15 per cent for Doha in Qatar, or 10 per cent in Sao Paulo, Brazil.

And with costs having risen by 5 per cent in the last 12 months and forecast to rise by another 5 per cent in the next 12 months, margins run the risk of getting even tighter.

So how, in simple terms, do you mitigate that?

Steve McGuckin, Turner & Townsend’s global managing director of real estate, told me that there are four things that need to be done on every project: “you have to brief it well, design it well, buy it well and build it well,” he said.

Sounds easy doesn’t it? But there are few major firms who’ve managed to avoid those dreaded problem jobs, for example Sir Robert McAlpine and McLaren continue to report losses due to legacy contracts, so clients and contractors need to get smarter to make sure that margins hold up.

“Boom and bust is the biggest challenge for a contractor,” said Mr McGuckin, and as the UK market continues to hot up, it’s vital that the lesson of the recession are not forgotten.

UK focus

Where’s hot and where’s not in the UK? Our exclusive data from forecaster Hewes & Associates shows which UK regions will be construction hotspots and which will struggle between now and 2018.

This week’s project report reeks of innovation – find out how Aecom, Murphy and Kier are attempting to cut bad smells by 99 per cent while modernising a north London treatment plant.

Charlie Schouten, editorial analyst, CN

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