UK Construction Market Report 3Q 2023
Tendering and contracts
Tender opportunities generally remain steady, although there is some caution seen in the survey results, with 19% of contractors and 30% of non-contractor respondents expecting tender opportunities to decrease in 3Q 2023, compared to 10% and 22%, respectively, forecasting them to increase.
Comments indicated that many schemes are stop-start, which impacts confidence. Some of the supply chain are responding to a slowdown in private development by switching focus to the public sector, which is increasing competition. Some are also concentrating on frameworks.
Respondents noted the most tender opportunities were for commercial offices, refurbishments and fit-outs and education, including higher education.
The S&P Global/CIPS UK Construction PMI for July signalled robust increases in commercial building and civil engineering.
Following the COVID-19 pandemic, changes in working habits have been seen. For instance, the Guardian highlighted polling by Centre for Cities, which found that office workers in central London spend on average 2.3 days a week in the workplace. That said, over three-quarters of survey respondents believe firms will generally remain in city centres rather than relocate to other spaces less central.
When asked about reasons that may compel firms to relocate from city centres, downsizing in response to increased hybrid working ranked highest, with rising rental costs and less requirement for a city centre presence also scoring well.
It remains easier to compile a tender list than in mid-2022, with contractors and the supply chain starting to actively enquire about projects in the pipeline. However, caution remains and 95% of contractor respondents said they or their supply chain had declined a tender — up from 78% in our spring survey. Of these, 52% said this was due to proposed tender or contract conditions and risk profiles and 40% stated a lack of capacity.
Survey feedback highlighted that some contractors are downsizing, therefore reducing capacity. Contractors also continue to be picky in what they bid for, with client status high up on the agenda. While focusing on securing next year’s work, there is caution not to over-commit with limited resources.
Constructor Mag recently highlighted extracts from Homes England’s corporate report for the year ending 31 March 2023 that relations between housing associations and contractors are “increasingly difficult” as each struggled to deal with the impact of inflation. The report said, “Housing associations reported increasingly difficult relations with contractors, with firms requesting fluctuation clauses, renegotiation of fixed price contracts and in some instances withdrawing from negotiations totally”.
Several survey respondents also noted that whilst the supply chain was looking for work, there are no signs of desperation as sufficient work is available. Therefore, tender returns align better with expectations, but there are currently no signs of low bidding.
Insolvencies
Registered company insolvencies remain high as businesses feel the impact of significant cost escalation, particularly for projects priced before those issues occurred. There is also concern about the slowing of projects progressing to site.
Constructor Mag reported that Rob Driscoll, Electrical Contractors Association (ECA) director of legal and business, blamed the high number of failures on “ridiculously difficult trading conditions” combining post-Brexit economic stagnation, a pandemic-led demand-and-supply shock to the economy, withdrawals of government support post-pandemic, double-digit inflation and interest rates that were “unseen for a generation”.
Analysis by insolvency practitioners Begbies Traynor, reported by Construction News, saw 61,423 of construction firms were in significant financial distress in 2Q 2023.
Insolvencies influence market perception and build on other market challenges to increase supply chain caution. They also impact capacity and in areas where several construction firms go bust, this can cause an imbalance in the market.
Respondent’s view of typical overheads and profit were 5.8% in our latest survey, slightly up on our last two surveys.
Market conditions mean that margins are under pressure. The Construction Enquirer reported that Sir Robert McAlpine’s margin fell below 1% in 2022, with the group delivering a 0.9% operating margin in its published results. The contractor continues to battle to restore margins after a year of supply chain, labour availability and inflationary pressures eroded them.
The pressure on margins and the issues already highlighted make contractors more risk-adverse. On projects that 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.
© 2023 Gleeds - all rights reserved
Gleeds privacy policy | Cookie Policy | Modern slavery & human trafficking statement | Equal opportunities & diversity policy