UK Construction Market Report 2Q 2023
Tendering and contracts
Construction output and tendering activity
Echoing wider industry data and in positive news for the construction industry, ONS data shows a 2.4% increase in monthly construction output in volume terms in February 2023 for ‘All work’.
It also shows that ‘All work’ is nearly 7% (6.9%) above the February 2020 level (pre-pandemic), with a 25.1% increase in repair and maintenance and a 2.6% reduction in ‘All new work’ in the period to February 2023.
Infrastructure and private industrial have seen high activity levels, with output increasing by 24.6% and 18.7%, respectively, between February 2020 and February 2023. In contrast, there were significant reductions for private commercial new work, 26.4%, and public other new work, 18.4%.
Keeping with the optimism, most respondents to our survey saw tender opportunities remaining the same or increasing in 2Q 2023, with only 8% of non-contractor respondents thinking that tender opportunities will decrease in 2Q 2023 and 35% expecting they will increase.
For 1Q 2023, there was divergence between contractor and non-contractor respondents, as 34% of contractors said that tender opportunities reduced in the quarter compared to 14% of non-contractor respondents.
Respondents noted the most tender opportunities were for education, including higher education and health and care.
In our Winter 2022/23 survey, the highest-ranked sector for tender opportunities was commercial offices, refurbishments and fit-outs. Although there were headlines in the industry press about a decline in commercial activity when writing the report, the narrative has since become more positive.
The S&P Global CIPS UK Construction PMI data for March, published in April, signalled an increase in commercial building work, despite the rate of expansion easing from February’s nine-month high (data published in March).
Whilst it is still easier to compile a tender list than in mid-2022, caution remains and nearly 80% of contractor respondents said they or their supply chain had declined a tender. Of these, 60% said this was due to proposed tender or contract conditions and risk profiles and 37% stated a lack of capacity.
Survey feedback highlighted serious concern over the quality of tender information, leading to cost and programme uncertainty and risk. In these instances, it was felt that the risk was passed to the contractor rather than challenging consultants to improve the quality of their work.
Many comments received stated a preference for two-stage tendering, with the reasoning being a better understanding of the risk profile. Single-stage tendering is more commonplace than last year, but in many markets contractors are still in a position to choose which projects they tender for and, in some instances, are insisting on a two-stage approach.
There were numerous mentions of single-stage tenders with onerous conditions and an inflexible approach to risk. Impossible budgets and unachievable timescales were also mentioned. Other feedback included increasing selection over bids, in both consultant and contractor teams, due to resourcing pressures.
Other respondents said that they target frameworks and existing clients for projects and are reducing the amount of competitive tendering they partake in, preferring the early engagement and collaborative approach instead.
Construction activity remains relatively strong and overall, it is essential to carefully consider procurement and tendering strategies to ensure suitability for the project circumstances. Early engagement is key to ensure sufficient resource, risks should be mitigated as much as possible and tender documents should outline a reasonable approach to these and market challenges.
Insolvencies
Registered company insolvencies remain high as businesses feel the impact of significant cost escalation, particularly for projects priced before those issues occurred.
Some question whether the spike in insolvencies seen in 2022 resulted from the end of government COVID-19 protection measures and, therefore, was effectively a backlog from during the pandemic.
The numbers of registered company insolvencies (for construction companies) per year were:
2019: 3,218
2020: 2,059
2021: 2,580
2022: 4,163.
Now that pricing has stabilised, expectations are that construction insolvencies will return to a more normal level. Although, there is feedback that some of the supply chain is in a precarious financial position, with profit margins squeezed by elevated costs. There is also evidence of impacts from other firms affecting those they worked with, regarding payments and cash flow.
Insolvencies influence market perception and build on other market challenges to increase supply chain caution. In areas where several construction firms go bust, this can cause an imbalance in the market.
Main contractor overhead and profits
Respondent’s view of typical overheads and profit were 5.5% in our latest survey, similar to the 5.6% seen for our Winter 2022/23 Report. This is lower than the 6% in Autumn 2022 and 5.9% in the Summer 2022 survey results.
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.
