Tendering and contracts

Nearly nine in ten contractors said they or their supply chain declined a tender in the past quarter. This was up slightly from our report covering 4Q 2023, where 82% said the same. The reasoning was reasonably equal between a lack of capacity, the proposed tendering/contract conditions/risk profile, or a combination of these.

With reduced construction output expected in 2024, the evident caution in the supply chain is important to consider, as some parts still have good levels of order books filled. Feedback continues that getting sufficient tenderers for complex or challenging projects can be tricky.

The supply chain remains risk averse. Due to the volatility in the market, clients tend to seek greater cost certainty, which some consultants translate to single stage tendering; however, for some projects, this leads to an unacceptable risk profile.

Some contractors are downsizing and restructuring, and insolvencies affect the industry — reducing capacity. Some Tier 1 contractors choose to focus on frameworks and public sector work.

Although there is an eagerness to secure future work, contractors are cautious about over-committing with limited resources. Clients should be mindful of unbalanced terms and conditions, assess the risk and reward balance and consider procurement routes that involve early engagement. It should not be assumed that contractors are open to more work, as some may be very wary about which projects they take on due to the market pressures.

With the Joint Contracts Tribunal (JCT) due to launch a Target Cost Contract in 2024, some are seeing this as a way to promote collaborative working and emphasise shared goals. However, it is crucial to ensure that the implications are carefully considered, reflecting the different perspectives and expectations of the parties. Whilst an advantage of the Target Cost Contract is aligning financial interests, which may encourage cost savings, there needs to be a balance between cost efficiency and quality.

The new executive chairman for HS2, Sir Jon Thompson, blamed the use of cost-plus contracts for 89% of the cost increase from 2020. He said: “We have to be upfront with you now, the government decision to let cost-plus contracts where there are very few incentives or penalties around them does not provide me with any real levers on contractors to do better in relation to schedule and costs because they receive a marginal reduction in their fee. If they spend 100% more than what was agreed, they only get 1% reduction in their fee.”

Unfortunately, construction insolvencies remain at an elevated level. Just over half of contractor respondents said they had been involved with projects impacted by insolvency in the last three months of 2023. This brings little surprise given the release of figures showing that an average of a dozen construction firms a day went bust from in the year to November.

Some respondents mentioned knock-on impacts from other projects with insolvency in the supply chain.

Ardmore recently posted an £11 million loss, with its managing director Peter Byrne writing in the accounts that: “The rising cost of materials and labour have ravaged all parts of the construction supply chain on fixed price contracts resulting in many corporate failures” and that “While inflation has eroded margins across all jobs, the supply chain failures have heavily impacted the margins on three key projects.”

Student housing and build to rent specialist Watkin Jones reported a pre-tax loss of £42.5 million in the 12 months to September 2023, compared to an £18.4 million profit the year before, despite turnover increasing by 1.5%. The figure includes £35 million of remedial costs and £3 million for restructuring. However, there was also an impact from the collapse of a contractor on a student accommodation scheme in Exeter, which added an extra £3.4 million to the construction cost.

Survey respondents said that typical main contractor overhead and profit margins in the current market are 5.9%, similar levels to our last two surveys.

However, recent industry press coverage shows the pressures faced. A recent study by Building Magazine found that half of the top 20 firms in its Top 150 Housebuilders and Contractors study reported a reduced pre-tax margin as did more than half of the 131 companies to provide figures for 2023 and 2022.

Laing O’Rourke made a pre-tax loss of £288.1 million for the year to 31 March 2023, due to rampant inflation and provision on a historic contract dispute in Australia. Its group chief financial officer said “Together with the whole UK construction sector, we were presented with extremely challenging market conditions during this trading period … Unprecedented inflation impacted margins on a small number of our fixed-price projects in the UK.”

Losses and low margins add to caution about risk and also make it more difficult for investment.