Autumn 2022 UK Market Report
Tendering, contracts and claims
Tendering activity has generally remained strong over the past quarter, with only 10% of contractor respondents and 21% of non-contractor respondents saying that tender opportunities decreased in the third quarter.
Looking ahead to the next quarter, 4Q 2022, some signs of slowing down are starting to creep in; 27% of contractors and nearly 40% of non-contractors forecast tender opportunities will decrease.
The S&P Global/CIPS UK Construction PMI experienced growth for the first time in two months, climbing to 52.3 in September, up from 49.2 in August. A score above 50 signals growth, while a score below shows contraction.
Whilst the latest result was the highest for three months, participants in our survey noted increases were due to work on previously delayed projects and that new orders remained “relatively scarce” in September.
Worries include lower consumer confidence, a challenging UK economy and recession. Construction firms reported greater degrees of risk aversion and slower decision-making from clients due to inflation concerns, squeezed budgets and worries about the economic outlook.
The data also showed that the New Orders Index slipped to its lowest since May 2020.
Respondents noted that the greatest number of tender opportunities are seen in the residential, public and education sectors.
Whilst the supply chain remains cautious, challenges attracting contractors to tender projects are easing as they look ahead to fill their pipeline and where some previously secured projects are slowing/stalling.
Claims
Fewer survey answers to our Autumn survey had made or seen claims concerning the Russia-Ukraine war than in our summer report.
Although the shock caused by the Russia-Ukraine war has somewhat abated, cost escalation pressures continue to impact the supply chain, particularly those delivering projects negotiated before the issues emerged.
Data from the Insolvency Service shows that 337 UK construction firms became insolvent in August with 3,944 construction firms going out of business in the year to August 2022; this is the highest number since the financial crisis.
A high proportion of the firms affected are specialist contractors who have been particularly impacted by market challenges.
Only 6% of the insolvent firms have been civil engineering firms — the infrastructure sector has been buoyant, thanks to activity from major projects. Contract/pricing structures have meant that issues have not always hit this sector as hard as they have others.
There is concern that insolvencies may continue to rise as activity slows and pressures remain.
From our recent surveys, respondents’ perception is that overheads and profit levels are generally steady.
The increased use of index linking, provisional sums and fluctuations clauses for volatile materials is helping to protect margins. Typically, when these are agreed, overheads and profit levels are in the normal range.
On projects which contractors perceive to carry more risk, higher risk allowances are built into tender prices. This is not only by the main contractor but also the supply chain, who try to hedge their position on the pricing of materials and products.
Mitigation steps
As the challenging backdrop persists, it remains important to make projects attractive to the supply chain to obtain the best prices. Mitigation measures seen include:
- Proactive negotiation with preferred main contractor/subcontractors/suppliers to work through risks and issues
- De-risking of projects as much as possible through surveys and enabling packages
- Phasing/splitting of large projects to reduce risk via shorter programme length
- Early orders to secure materials/products to protect the programme and to obtain cost certainty
- Booking of key resources/teams to secure the best for the project
- Use of fluctuation clauses, prime cost (PC) sums, provisional sums, index linking of material supply costs, etc.
- Increased understanding of pipeline and financial standing
- Consideration of alternatives in case of sourcing difficulties
- Being open to different suppliers to ensure competition.
While value management is always important, it is particularly so at a time when budgets are under pressure. Regular reviews should be undertaken to look for opportunities and to ensure the best use of available resources.
