Whilst full order books mean the construction industry is likely to remain busy in 2008, the impact of the credit crunch on new developments remains to be seen, according to a report compiled by project and cost consultancy Davis Langdon.

It indicates that tender price inflation rose by five per cent in the Midlands region over the last year due to strong workload and an increase in the prices of materials and labour.

Construction materials prices rose by 4.5 per cent in the first eight months with timber seeing the biggest gains as world demand redirected supplies away from the UK.

Fabricated structural steel prices rose 19 per cent over the year to August whilst stainless steel prices, peaking in June after more than doubling in 18 months, have fallen back 20 per cent in response to a sharp fall in nickel prices.

"Other materials prices may be more restrained this year than last but with oil breaking new records, manufacturers could be facing new input cost rises, and that may presage a new round of higher than usual price increases in the new year," said Peter Fordham, of Davis Langdon, author of the report.

The forecast also shows that the value of new work rose by more than £3 billion over the last two years, led by high office and housing activity with the strongest housing growth in the north, whilst London dominated the office market.

However, whilst new orders surged ahead in the first half of the year, seven per cent higher than the previous year and 14 per cent up on 2005, figures for July and August were a cause for concern, down from the first half.

This followed the FTSE in July recording its sharpest one-day fall since September 11, 2001.

Next year's rise in activity is expected to be led by private commercial work, particularly offices, whilst retail growth will be muted but the leisure sector boosted by the Olympics.

"We need to ask ourselves whether July and August's downturn in new orders will be magnified by the credit crunch," continued Mr Fordham.

"Offices and housing gave the industry its biggest fillip for two years and these are the areas most at risk.

"With house prices declining in some areas and mortgage applications down, private housebuilding is anticipated to reduce next year.

"Buy-to-let landlords may benefit from the change to capital gains tax but with higher mortgage rates and funding less readily available, this market may have peaked."

David Ainsley, of Davis Langdon's bank and finance group, added: "My team has noted clear signs of nervousness among banks as regards the funding of private sector residential developments, including the withdrawal of facilities at short notice."

To what extent the private commercial side will be affected by the credit crunch remains to be seen as viability was sometimes already coming under question as costs rose. Tighter, more expensive finance has added another burden.

London is the only sector reporting office rental growth; retail capital values are falling and rental growth is weak.

As consumer spending falls, the retail sector is likely to suffer further. However, the private sector is not the only area to suffer. The public sector is not immune.

Mr Ainsley said: "Pricing of long-term debt for PFIs has risen by over 25 base points in recent weeks; this has made deals more difficult to close."

For the moment, developers are continuing to drive projects forward and prices, particularly in London, remain volatile.

In due course, a tighter funding regime may result in less viable projects failing to make it to site, but contractors will have full order books into 2008, ensuring the industry remains busy.

David Langdon's office in Birmingham is working on a number of major projects including Eastside Park and change management for the Youth Hostel Association and De Montfort University's Faculty of Business and Law.

The firm has worked on a number of high profile projects including Tate Modern and Eden Project Cornwall.