UK Construction Market Report 3Q 2024
Tendering and contracts
Key statistics:
Refurbishment
of survey respondents said that their projects are predominantly or mostly refurbishment.
Tender list issues
of those that took our survey experienced issues getting a sufficient number of tenderers in 2Q 2024.
Insolvencies impact
of contractor respondents said they had a project affected by insolvency in 2Q 2024.
The ONS reported an improvement in the quarterly new orders for construction between 4Q 2023 and 1Q 2024. Overall, there was a 15.9% increase in "all new work" and "all new housing" was the only sector to experience a decline in quarterly performance.
Although the data presents a more optimistic outlook, year-on-year figures revealed a 2.9% decrease, with the “public”, “private commercial” and “all other work” sectors still showing positive results.
The upcoming release for 2Q 2024, expected later in August, is likely to show further improvement. The August edition of the S&P Global UK Construction PMI indicated that the index stayed above the 50.0 no-change mark for the fifth consecutive month in July. New orders data from the PMI release showed a sixth consecutive monthly expansion, marking the strongest pace since April 2022. Alongside a general improvement in market demand, there were also reports that customer confidence has strengthened, making the release of previously paused projects more likely.
With the general election now concluded and the Bank of England having cut interest rates for the first time since the pandemic began in March 2020, there is hope and expectation of increased construction activity.
According to our survey respondents, most tender opportunities are found in the public sector, commercial offices and education (including higher education). Additionally, residential and energy and infrastructure also see high levels of tender opportunities.
In the June edition of the S&P Global Construction PMI, activity increased across all three categories — housing, commercial and civil engineering — for the first time since May 2022. Our 2Q 2024 Market Report shared anecdotal evidence of a resurgence in projects that were previously on hold, driven by expectations of lower interest rates later in 2024.
Recent data from Glenigan showed an increase in new starts in the three months to July, with residential construction leading the turnaround, up 12%. Glenigan’s economics director, Allan Wilen, said: “A clear sign confidence is starting to return to the market. This is evidenced by the spike in private housing starts, a longstanding barometer of investor conviction and consumer appetite.”
A greater number of respondents, 40%, reported that projects are predominantly or mostly refurbishment, compared to 27% who said the same for new developments.
The reuse and refurbishment of buildings continue to be prioritised to meet sustainability aspirations, reducing the embodied carbon footprint of developments.
The latest Deloitte London Office Crane Survey saw the volume of refurbishment projects overtaken new builds, reflecting a notable trend. By March, the total volume under construction reached a record 16.4 million sq ft across 127 schemes, with new project starts totalling 4.2 million sq ft. Despite an 18% decrease in new build starts compared to the previous survey's peak, the figures still surpassed the 10-year average.
In the first quarter, refurbishment starts amounted to 2.3 million sq ft, nearly double the volume of new builds. Sophie Allan from Deloitte attributes this shift to the rising demand for premium office space and the implementation of energy standards, which are driving the preference for modernising outdated premises. This trend towards refurbishment is expected to continue over the next decade.
Refurbishment is also used to reimagine spaces. First images of what the revamped HSBC tower in Canary Wharf will look like have been released. Canary Wharf Group said: “The images of the 1.1 million sq ft building demonstrate the transformation into a unique destination, which will include best-in-class workspaces, leisure, entertainment, education and cultural attractions.” The group aims to broaden the mix of tenants across the estate in response to post-pandemic working practices and higher borrowing costs.
For the second quarter running, over a third of survey respondents said they experienced issues getting sufficient tenderers in the past quarter.
Respondents commented that contractors are still cherry-picking which opportunities to pursue, with some preferring direct appointments through frameworks and actively avoiding competitive tendering. Some respondents reported full order books and a lack of appetite for single stage tenders due to there still being plenty of work.
One respondent highlighted an experience where a client had a protracted tendering process and an upward budgetary constraint mechanism, which caused significant delays in tender-to-contract conversion and resulted in good tenderers declining in their numbers.
Conversely, another respondent noted that a high-quality tender had received well-considered returns.
In our 3Q 2024 survey, eight out of 10 contractors reported that either they or their supply chain declined a tender in the second quarter due to insufficient capacity, the project’s risk profile, or a combination of these factors.
The supply chain remains risk-averse because of market volatility. Some contractors are downsizing and restructuring, and insolvencies are impacting the industry by reducing capacity and affecting both the perception of risk and the willingness to take on new projects.
Certain segments of the supply chain are very selective about the projects they take on due to market pressures. Consequently, there is a growing consideration of construction management.
For instance, the 18 Blackfriars project, a 45-storey office building and two residential towers with an estimated cost between £800 million and over £1 billion, is considered too risky for a design and build contract, as it represents a significant portion of a firm’s turnover and could be financially overwhelming. Contractors have shown interest, but only if it is let on a construction management basis. There have also reportedly been discussions about potentially breaking the project down into smaller design and build packages to better manage the risk.
M&E contractor NG Bailey has reported a successful return to profitability by shifting its strategy away from fixed-price schemes and negotiating deals directly with end clients. This strategic shift towards more flexible contract structures and enhanced risk management, has helped the firm recover from previous losses linked to lump sum contracts, project delays and inflation.
Clients should be mindful of current market conditions and engage with the supply chain early. It is crucial to avoid imposing unbalanced terms and conditions and assess the risk-reward balance to make projects more attractive, particularly for complex projects.
In May 2024, construction firms accounted for 17.7% of all insolvencies in England and Wales, with 354 construction businesses becoming insolvent. Over half of contractors who responded to our 3Q 2024 survey said their projects were affected by insolvency in 2Q 2024, with some saying that a number of sub-contractor insolvencies had affected their projects.
Over the year to May 2024, the total number of insolvencies in the construction sector rose to 4,287, marking a 1.9% increase from the previous year and a 33.2% increase compared to 2019. This makes the construction industry the sector with the highest number of insolvencies.
Although the insolvency rate has risen since the lows of 2020 and 2021, it remains well below the peak of the 2008-09 recession, largely due to a significant increase in the number of registered companies.
Survey respondents said that typical main contractor overhead and profit margins in the current market are 5.9%, marking the fifth survey at this level.
However, like in previous reports, margins remain squeezed and contractors continue to report significant losses. This challenging environment increases caution about risk and makes investment and innovation more difficult.
Lendlease recently announced unexpectedly it is exiting the UK market and selling its overseas construction businesses to focus on operations in Australia as part of a major restructuring effort. This strategy aims to free up AUD 4.5 billion (£2.35 billion) to reduce debt and enhance shareholder value. The decision comes after a decline in share prices, with Lendlease's stock losing around half its value since the pandemic.
Key factors driving the exit include low earnings from overseas construction (only 0.6% of total revenue) and challenges with long-term projects that have negatively impacted returns. Delays in major UK projects, such as the ITV studio redevelopment and the 120 Fleet Street job, have exacerbated the issues.
The sale will reduce the pool of Tier One contractors available for major projects. A reduction in the number of large players could potentially lead to less competitive pricing and fewer options for clients.
BAM Construction is facing job cuts after reporting a £19.5 million loss in the first half of 2024, largely due to issues with the Co-op Live arena project in Manchester. The project, initially budgeted at £350 million, saw costs rise to £450 million due to delays and slow progress, resulting in a £25 million loss for BAM.
While BAM Nuttall, the UK civil engineering division, saw profits more than double to £36 million, overall performance in the UK construction sector has been challenging. CEO Ruud Joosten noted that BAM needs to adapt to market conditions.
Sir Robert McAlpine reported a £110 million operating loss and a 19% drop in revenue to £881 million for the year ending October 2023. The loss was mainly due to substantial financial issues with four major price-based contracts, which were either completed in 2023 or are scheduled to finish this year.
Despite these setbacks, McAlpine has shown signs of recovery in early 2024. With a cash balance of £105 million and a strong order book worth £1.4 billion, the firm has improved its trading performance. Significant contract wins, such as the £500 million 2 Finsbury Avenue project and a major build at a £4 billion battery factory, have strengthened the order book.
CEO Neil Martin, who took over in February, expressed optimism about the company's recovery, noting a return to industry-standard margins and a solid pipeline of work driven by both existing and new clients.
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