Tendering and contracts

Almost nine in ten contractors said they or their supply chain declined a tender in the quarter due to a lack of capacity, the project’s risk profile or a combination of these factors, continuing the high levels seen from mid-2023 and up 11 percentage points on the 78% who reported the same a year ago (for 1Q 2023).

The supply chain remains risk-averse due to market volatility. Some contractors are downsizing and restructuring, and insolvencies affect the industry — reducing capacity and affecting the perception of risk and appetite for projects.

Some parts of the supply chain are very selective about which projects they take on due to market pressures, particularly in areas rocked by high-profile insolvencies — an example of this in the North East, which has seen the collapse of significant local businesses. Companies are naturally keen to avoid the same fate and, therefore, consider the reasons for the failures and try to protect themselves from the risks.

Clients should be mindful of the market situation and consider early engagement with the supply chain. Avoiding unbalanced terms and conditions is important, as is assessing the risk and reward balance to improve attractiveness.

One contributor gave the example of the client increasing the overhead and profit percentage above that agreed as part of the framework to promote a better and more transparent relationship with the contractor and to increase interest in a complex project.

In contrast, another comment highlighted that a client struggles with tendering due to their internal procurement set-up and the use of single stage fixed price Design and Build Contract, with pushback from the supply chain on their terms and low numbers bidding.

According to the latest data from The Insolvency Service, nearly 20% of all insolvencies in the past year occurred within the construction industry, resulting in 4,403 firms going out of business.

Building Magazine highlights that the latest insolvency figures come amid easing inflation rates, with 1,815 firms across all sectors going bust last month, 17% lower than in February 2024 and 17% lower than the same month in the previous year.

Three in ten contractor respondents to our survey said they had been involved with projects impacted by insolvency in the first three months of 2024, down from 54% in our survey looking at 4Q 2023.

Whilst some pressures have eased, some projects experience knock-on impacts from other projects with insolvency in the supply chain.

Begbies Traynor, the administrator appointed by Readie Construction, highlighted the impact of insolvencies on the wider industry in an update filed at Companies House. It said: “During the autumn of 2023, two large main contractors failed which, consequently, created shocks in the trade credit insurance markets as well as the bond surety markets. The ability of [Readie’s] subcontractors to obtain trade credit insurance was severely reduced and, in turn, the availability of performance bonds was also massively reduced.”

The report also highlights the strain on margins and completion dates brought by the failure of two mechanical and electrical (M&E) firms, as well as the effects of materials inflation on fixed price contracts, particularly in the wake of Russia’s invasion of Ukraine. It says: “This situation created extreme pressure on the company and its supply chain and it experienced a large number of subcontractor failures across many projects. The process of sourcing replacement subcontractors caused significant harm to the company’s margins as well as to project completion dates.”

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

However, like in previous surveys, margins remained squeezed. The April edition of the S&P Global UK Construction PMI, looking at March, reported political uncertainty, squeezed margins and financial pressures as factors weighing on optimism.

Our last report highlighted significant contractor losses and how these and low margins add caution about risk and make it more difficult for investment and innovation.

Scape recently launched its Charter for Change, setting out key recommendations for the next UK government to use the built environment as a catalyst to drive productivity, resilience and economic growth.

Mark Robinson, chief executive of Scape, told Building about the suggestion that public sector clients fix profit margins for contractors, saying doing this “one simple thing would totally transform the industry.” Many industry problems result from people trying to make the margin rather than focusing on quality; with an appropriate fixed margin, contractors could make reinvestment plans, recruit better quality people and support investment in new technology and equipment.