Tendering and contracts

The outlook for tender opportunities is optimistic, with 41% of survey respondents noting an increase in tender opportunities in the last six months and 54% of respondents anticipating an increase over the next six months.

Expectations are for the recovery and growth of the Peruvian construction industry, driven by substantial public investment, significant infrastructure works and mining projects.

Looking ahead for a longer-term picture, respondents expect more tender opportunities in 2024 compared to 2023, with 60% of respondents forecasting an increase.

Peru’s National Infrastructure Plan for Competitiveness (PNIC), launched in 2019 and updated in 2022, sees investment of PEN 146 billion, according to Perumin. The 2022 update brought with it the inclusion of two new sectors, health and education. Therefore, it is little surprise to see these two sectors performing strongly in our survey, with 50% and 47% of respondents saying they saw the most tender opportunities in these sectors.

The 2022 update did, however, see that there were no projects in the energy sector under the initiative when previously there had been nine. Meanwhile, transportation projects had gone down from 26 to 18.

Despite the plans showing diminishing spend on transport projects, significant projects within this sector are ongoing in the country. The New Jorge Chavez airport is currently undergoing a vast expansion. The private investment project to create a new modern terminal will meet the needs of the growing tourism industry.

It is little surprise that energy and infrastructure scored so highly in the survey, with 47% of respondents noting the sector as one with ample tender opportunities. For example, a major infrastructure project is well underway in the once-sleepy town of Chancay. The Financial Times reports that the beachfront is an expansive construction site with cranes and dumper trucks in full operation. The town will soon boast one of the largest deepwater ports in Latin America.

Construction and operation of the port are being carried out entirely by private companies, which many hope will become a default model for infrastructure works in Peru. In the long term, the aim is to draw trade from Latin American countries through Peru, utilising the port to trade with Asia. Achieving this would further boost the country’s economy.

The El Niño weather event, which brought devastating floods to Peru in 2017, impacted an area four times as large as the UK and caused approximately £2.3 billion in damage.

The UK Export and Finance-backed partnership between Gleeds and other UK partners is helping construct 18 healthcare facilities and 74 secondary schools as well as providing comprehensive flood defences for 17 river basins and seven cities along the coastal regions of Peru, protected by a new integrated early warning system.

Therefore, it is unsurprising that 33% of survey respondents predominantly see new-build tender opportunities come to market. It is also apparent that refurbishment opportunities are abundant, with 30% noting they saw some refurbishment while 10% said refurbishment projects had come to market mostly.

Peru has seen a rise in refurbishment works in northern regions, with a commitment from the government to improve local infrastructure. The Financial Times reports that much of the recent civil conflict in the country has arisen from the proposal of new mining projects, with residents of poorer regions opposed due to the fear of further environmental damage. Their bargaining chip is to demand the completion of infrastructure projects before mining projects start.

Despite much of Latin America being hit by recession last year, 45% of our survey respondents claimed they or their supply chain had declined a tender opportunity during the last six months.

This situation can, on one hand, signal a buoyant market, allowing the supply chain to be more selective in which opportunities they pursue. It can, however, signify other challenges, such as the struggle for skilled labour to undertake the amount of work available to the market. Therefore, the decision to decline a tender may be one of necessity rather than of choice.

Of those claiming they or their supply chain have turned down a tender opportunity in the last six months, just over 40% (41%) said that the primary factors were proposed tender or contract conditions and an inadequate risk profile.

Delays and standstills in major Peruvian projects due to political and contractual issues exemplify the risk to the supply chain if contracts do not cover instances of cancelled and abortive work or inefficient working.

Reuters reported that a dispute over the exclusive operation of the Chancay port threatens to boil over into international arbitration, which will do nothing to aid confidence in delivering the mega port.

The Lima Metro Line 2, which commenced trial operations in early 2024, has been impacted by political indecision. Rail Journal quotes the Peruvian president, Dina Boluarte, “This project has been stuck for 11 years, but when there is a political decision, it can be unblocked and move forward”.

Delays of that magnitude have ripple effects felt way down the supply chain and are detrimental to cash flow, which is a necessity to any business but even more so for small and medium-sized enterprises with little credit and finance facilities.

Globally, business insolvencies have risen sharply since the pandemic. In the construction industry, fixed-price contracts left many supply chain members unable to deliver their contractual obligations as material and labour costs escalated rapidly — Peru is not immune to these trends. The economic downturn, political instability and a lack of robust financial support mechanisms for struggling companies have resulted in increased insolvencies.

The adoption of standard contract models such as NEC4 has been largely positive in Peru for this reason, as it introduced contract models such as NEC4 Option C, whereby the client can still obtain a degree of cost certainty through the target price, and the contractor has more certainty of meeting its contractual obligations at a profit due to the cost reimbursable nature of the contract.

Our survey respondents heavily leaned toward the upper scale of overhead and profit margins. This level is symptomatic of a supply chain selective in the opportunities it is taking on, able to apply higher margins as its pipelines are robust, but also requiring more cost to cover other overheads.