Spring 2022 UK Market Report
Tendering, contracts and claims
Tendering activity has remained strong over the past quarter, with only eight percent of contractor respondents and 15 percent of non-contractor respondents saying that tender opportunities decreased in the first quarter.
Looking ahead to the next quarter, 2Q22, the majority of respondents said that they thought tender opportunities would remain at the same level. Of contractors who responded to our survey, 22 percent thought that tender opportunities would reduce in the second quarter.
Latest data from the S&P Global/CIPS UK Construction PMI shows that total new order volumes expanded at the slowest rate for four months in April, with escalating raw materials costs, higher borrowing costs and geopolitical uncertainty noted as the primary causes of hesitancy.
However, the data also suggests that a strong pipeline remains and commercial work continues to be the fastest growing of the three main construction segments monitored, with firms citing spending related to COVID-19 recovery plans and pent-up demand for commercial projects.
Survey respondents indicated that the top five sectors for current tender opportunities are:
- Residential including student accommodation (44%)
- Education including higher education (41%)
- Commercial offices, refurbishments and fit-outs (38%)
- Health and care (27%)
- Public sector (25%).
Energy and infrastructure and logistics and warehouses were also ranked highly.
Due to the volatility in the market, contractors are being more selective over the projects and clients that they tender for. In our survey, 78 percent of contractor respondents and 63 percent of non-contractors said that they had declined to tender a project, or had a contractor pull out of a tender, due to the selected procurement route or tendering strategy on a project.
There is limited appetite for single-stage Design and Build due to the level of risk. It was noted that main contractors are getting a better response from their supply chain for traditional contracts, particularly where quantities are provided.
Contractor feedback also identified the importance of tender list selection — the right number of contractors should be approached. There was also note of unusual activity, for example, unexpected competition on the tender list, subcontractors pricing full projects or larger contractors competing for smaller than usual projects.
To get a good tender response, it remains important to engage early with contractors to ensure that they are aware of the project/have capacity to tender. Design information and tender documentation should be robust and well-considered and changes during the tender period and post-tender should be minimised.
Steps also should be taken to ensure that risk is correctly allocated to the party best able to manage it. This may mean conversations regarding risk-sharing between contractor and employer, depending upon the context and the length and material make-up of the project.
Generally, early engagement with the supply chain and the placing of early orders were considered beneficial to overcome the challenges arising from the volatility.
Contractor respondents were more likely to propose the use of fluctuation clauses and pain gain mechanisms than non-contractor respondents. Similarly, contractors were more likely to advocate contract amendments/Liquidated Damages concessions, the linking of certain materials to indices and PC Sums for materials supply than non-contractor respondents.
Only 34 percent of respondents to our Spring survey had made or seen claims concerning the Russia-Ukraine war. However, many are expecting to receive them due to the challenges caused.
The volatility arising from the crisis has aggravated issues of the COVID-19 pandemic. Although much of the supply chain has become savvier regarding cost escalation, the significant increases will cause challenges, particularly for those delivering projects before the issues emerged.
Some contractors take a more contractual approach on projects to recoup margins/reduce the burden of additional costs.
The effect of pressures on companies is demonstrated in the latest quarterly release from The Insolvency Service, indicating that 1Q22 had the highest number of business insolvencies in England and Wales since 2012.
The data shows that 67 construction businesses became insolvent in February 2022, an increase of 22 percent on January and higher than the number before the pandemic.
Mazars highlighted that the cost of living crisis is starting to bite and that “Construction businesses are facing a very tough period. With inflation not yet under control, cost and supply chain pressures are going to get worse for the sector before they get better.”
From difficulties finding replacements to finish projects, to causing an imbalance in the market, the impact of insolvencies can be enormous. The Construction Playbook acknowledges this, and ‘Resolution Planning and Ongoing Financial Monitoring’ is included as one of 14 key policies, recognising that ‘although major insolvencies are infrequent, we need to be prepared for the risk to continuity of critical projects posed by the insolvency of key suppliers’.
