Tendering and contracts

Over 80% of contractors said they or their supply chain declined a tender in the past quarter. This was down from 95% in our Summer Report covering 2Q 2023, reflecting that some parts of the supply chain are starting to look to fill their pipeline, but it still represents the significant caution in the market.

Feedback is that getting sufficient tenderers for complex or challenging projects can still be tricky. Some contractors who completed the survey highlighted the difficulty in providing a fixed price. 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.

Projects with longer programmes sometimes see considerable risk premiums, leading some clients to consider construction management.

On the other side of the coin, one client respondent highlighted that they will only follow up on development opportunities across the UK if there is sufficient competition in the local market. They prefer to avoid two stage tendering and expressed concern about the limited main contractors available in some areas.

Survey feedback also highlighted that some contractors are downsizing and restructuring, which reduces capacity. Some Tier 1 contractors choose to focus on frameworks and public sector work. While there is an obvious appetite to secure future work, there is a concern not to over-commit with limited resources.

Unfortunately, construction insolvencies remain at an elevated level and the recent spate of high-profile firms going under, such as Michael J Lonsdale and Henry Construction in the London market, shows the magnitude of the issue.

Insolvencies can heavily disrupt and influence local markets for a long period after the event, not least affecting other suppliers and subcontractors the companies worked with.

Survey respondents said that typical main contractor overhead and profit margins in the current market are 5.8%, the same as our Summer 2023 survey.

However, recent industry press coverage shows the pressures faced. The Construction Enquirer reported that Vinci’s building division made a £37.3 million pre-tax loss compared to an £11.7 million profit in 2021. It blamed two fixed price projects signed before the COVID-19 pandemic for the losses — a £100 million new specialist hospital for a private healthcare provider and a £100 million student accommodation project. The company said it will no longer take on medium or long-term contracts “if they do not include fair price adjustment clauses.”

Other companies have also reported losses reporting challenging conditions. Bouygues UK saw a £42 million loss due to building safety work provisions, cost inflation and labour shortages. Civils contractor Alun Griffiths registered a £20 million loss with provisions including onerous projects with increased inflation and design revisions.

Sir Robert McAlpine is rumoured to be identifying further job cuts as part of ongoing streamlining. Earlier in the year, it switched from a regional to a national sector-based operating model. Results for the year to October 2022 saw the company deliver a 0.9% operating margin, down on the previous recovery year, which was 1%. Supply chain, labour availability and inflationary pressures eroded profitability and it now plans to prioritise sectors where it has successfully bid to improve margins.

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