UK Construction Market Report 1Q 2023
Tendering and contracts
In our latest survey, more respondents saw opportunities increase in 4Q 2022 and forecast them to rise in 1Q 2023 than those who thought there had been or would be a reduction in opportunities, across both contractors and non-contractors.
Comments included that there is still a backlog of work following the slowdown during COVID-19, where some schemes were put on hold. There were also notes that foreign investment remains strong, particularly in London.
Others noted a slowdown across both the public and private sectors, remarking that schemes are taking longer to progress to site. Some highlighted that they are less concerned about the pipeline in 2023 but are nervous about replacement projects for 2024.
Some responses blamed prolonged pre-construction service agreement periods (PCSA) and unattractive procurement routes when the supply chain remains cautious. A few also mentioned the higher risk profile perceived for the Building Safety Act impacting residential projects.
The January release of the S&P Global/CIPS UK Construction Purchasing Managers’ Index Total Activity Index indicated that the headline seasonally adjusted index registered below the 50.0 mark in December 2022, at 48.8. This marked the first contraction in construction sector output since last August.
Data also highlighted a reduction in new orders placed with contractors, following a modest uplift in November. The rate of contraction was the fastest since May 2020. According to their survey respondents, the fall was driven by weak client demand, linked in turn to higher prices charged.
Nearly nine in ten of our survey respondents said that inflation is impacting the viability of schemes.
Some comments received were that cost planning allowances for inflation have often been grossly underestimated, leading to issues with scheme affordability. Others reported that this was mainly a 2022 issue and budgets appear to have increased, now less of an issue for 2023.
Others mentioned the pressure of inflation on margins and the impact on viability.
Caution through the supply chain was raised, despite concerns about the wider economy, contractors are still selective over tender opportunities.
Evidence is also seen of clients not accepting second-stage offers following PCSAs based on viability. There is some anecdotal feedback that contractors are considering single-stage tenders again, depending on conditions, following PCSA “hell” of heavy resource input but schemes not progressing as planned.
Respondents noted most tender opportunities are for commercial offices, refurbishments and fit-outs, followed by education and health and care.
Insolvencies
Although the shock caused by the Russia-Ukraine war has 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 361 UK construction firms became insolvent in November with 4,401 construction firms going out of business in the year to November 2022.
A high proportion of the firms affected are specialist contractors who have been particularly impacted by market challenges.
There is concern that insolvencies may continue to rise as activity slows and pressures remain.
The UK construction industry also relies on supply chains outside of the UK that are facing similar challenges. There is the risk of insolvencies from non-domestic suppliers.
Levels of collaboration remain high as teams work together to navigate and resolve impacts and challenges.
Some comments received were that design team collaboration has improved and alternative materials and products are being considered to overcome cost and extended lead-in time issues. There was also mention of increased innovation on site to help improve quality.
Improved awareness of the issues around inflation and materials availability are being considered early, with specialist input being obtained.
General trends across the comments were increased discussions around appropriate risk apportionment. Some noted more negotiated procurement routes.
However, other comments were that some clients are still looking to fix prices, at times unreasonably. With the outlook for materials pricing steadying, some mechanisms which have been used to address volatility, such as index linking, provisional sums and fluctuations, are equally being incorporated to allow project budgets to benefit if costs reduce.
Overall, it is clear that caution persists within the supply chain and it remains important to establish a project with good principles to achieve the desired results.
Overheads and profit levels
Respondent’s view of overheads and profit were slightly reduced in our Winter 2022/23 survey, at 5.6% from 6% in our Autumn survey and 5.9% in our Summer survey.
Some anecdotal evidence is that contractors are slightly lowering their overhead and profit levels, typically by less than 1%, in order to secure projects.
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, products and labour.
