UK Construction Market Report 4Q 2024
Tendering and contracts
Key statistics:
Contractor challenges
of survey respondents said cash flow is the biggest challenge for contractors.
Declining tenders
of contractor respondents said they or their supply chain declined a tender in 3Q 2024.
Insolvencies impact
of contractor respondents said they had a project affected by insolvency in 3Q 2024.
New orders and tendering
ONS and Barbour ABI data shows a decrease of 22% in total construction new orders in 3Q 2024 compared to 2Q 2024. This follows an increase of 16% in 2Q 2024 compared to 1Q 2024. 3Q 2024 showed the lowest level of total construction new orders (£9,673 million) since 4Q 2023 (£9,126 million), although this isn’t surprising due to the election.
Other new work new orders (i.e. non-housing) were the largest contributor to the decrease in 3Q 2024, falling by 18.3%. This mainly came from private commercial new orders, which fell by 20.8%, and public new orders, which decreased by 28.0%. Housing new orders decreased by 32.6% in 3Q 2024, predominantly from private new housing, which fell by 31.3%. Public new housing fell by 40.5%.
The November release of the S&P Global Construction PMI showed that total new work expanded at a solid pace in October. The latest expansion was softer than the two-and-a-half-year high seen in September, with political uncertainty and subdued household demand due to cost-of-living pressures cited as factors limiting new order growth in October. That said, many construction companies noted strong sales pipelines and tender opportunities linked to generally improving domestic economic conditions.
Following the general election, the Autumn Budget and with gradually reducing interest rates, increased activity is expected. The Construction Products Association’s Autumn forecasts saw cautious optimism returning to the industry, with total construction output predicted to rise by 2.5% in 2025 and 3.8% in 2026 after falling by 2.9% in 2024.
Our survey respondents said they see most tender opportunities in the education sector. Additionally, residential and data centres also see high levels of tender opportunities.
The November release of the S&P Global Construction PMI saw expansion in civil engineering and commercial work categories, with housebuilding registering a slight decline — the first decrease in residential activity in the index since June.
A recent Glenigan forecast predicts a bounce back in construction starts over the next two years, driven by a combination of increased private sector confidence and public investment. It expects the housing sector to be a key driver of the recovery, whilst its forecasts suggest that education work will level off in 2026 due to weak university investment undermining increased government spending on schools. Civil engineering is due to see robust activity due to strong growth in utilities work plus government support for major transport schemes such as the £1.3 billion HS2 rail tunnel to Euston, the £2 billion TransPennine route upgrade and £2 billion East-West rail link.
In our 4Q 2024 survey, 67% of contractors reported that either they or their supply chain declined a tender in the third quarter due to the project’s risk profile, insufficient capacity, or a combination of these factors.
While this marks the lowest percentage of declined tenders since we began tracking this data in 1Q 2023, caution remains prevalent across the supply chain. Persistent market challenges, including elevated levels of construction insolvencies and the high-profile collapse of ISG, weigh heavily on contractor sentiment.
Amid these pressures, some parts of the supply chain are becoming increasingly selective about the projects they pursue. Clients must adapt by engaging with the supply chain early and aligning expectations with current market conditions. This includes avoiding the imposition of unbalanced terms and conditions and carefully evaluating the risk-reward balance, especially for complex projects, to ensure they remain attractive.
Insolvencies and market impact
According to the Insolvency Service, in September 2024, construction firms accounted for 16.2% of all insolvencies in England and Wales, with 292 construction businesses becoming insolvent. A third of contractors who responded to our 4Q 2024 survey said their projects were affected by insolvency in 3Q 2024, with some saying that a number of sub-contractor insolvencies had affected their projects.
Over the year to September 2024, the total number of insolvencies in the construction sector was 4,264, marking a 0.7% decrease from the previous year and a 32.5% increase compared to 2019.
Despite the decrease compared to September 2023, construction experienced the highest number of insolvencies in the year to September 2024 of all cases where the industry was captured in the statistics.
Over half of our survey respondents (58%) said they were surprised by ISG's collapse. Many comments highlighted that while it was known ISG was in financial trouble, they thought a recovery plan was in place and that there was a buyer who would invest in the company. Others expressed surprise at the speed of the collapse.
Six in ten of our survey respondents think that more Tier One contractors are likely to go into administration in the next 12 months. Some respondents said that some Tier One contractors are facing the fallout from fixed price commitments on long-standing projects secured during significant cost uncertainty.
Others highlighted that whilst contractors are less willing to take on risk, many projects are already in contract. With cost inflation, labour and global tension pressures now known, contractors may be tied into contract conditions that could now be considered unfair.
There is also considered an opportunity for contractors to complete ISG projects for a premium, for instance on a cost plus basis, which would offset potential issues if well-executed.
Analysis from Barbour ABI indicates that ISG was working on 69 government projects, including 22 projects for the Ministry of Justice and 16 projects each for the Department of Education and the Department for Work and Pensions.
The failure of ISG has also impacted tender lists. Building reported that two firms, Overbury and Mace, were left bidding the £200 million fit-out of HSBC’s new offices at 81 Newgate Street.
Over half of our survey respondents (53%) said that cash flow is the biggest challenge for contractors.
Analysis by EY-Parthenon on profit warnings issued by listed construction companies revealed that 22% of FTSE Construction and Materials sector companies have issued profit warnings in the last 12 months. Analysis of the data found that the construction industry is particularly exposed to financial difficulty due to the nature of contract cycles and cash flow management challenges.
Analysts warned that construction insolvencies had dampened the appetite for trade credit insurance and bonding, with increased costs and intensifying scrutiny.
Industry challenges and change
ISG’s collapse has prompted discussion about the change needed in the construction industry to prevent further high-profile failures and the far-reaching impact on the supply chain.
Suzannah Nichol, the chair of Build UK, said: “For too long, inappropriate transfer of risk and unsustainable profit margins have been accepted as the way to do business, despite the recommendations for more collaborative and sustainable ways of working featured in every report since [the] Latham [report called Constructing the Team and published in 1994]. We have to change the way the industry operates in order to prevent more companies ending up in this position, which is distressing for everyone involved.”
The Construction Leadership Council published a statement that, in its view, “standard form building and engineering contracts and professional services contracts issued by contract-producing bodies, should be used by clients with no amendments, except where necessary in the context of project-specific risks and relationships.” It said that “onerous amendments make contracts unviable, reduce competition, increase risk and lead to unnecessary legal costs required to review legal liabilities created by the amendments.”
A third of our survey respondents believe that the collapse of ISG will bring about positive change in the industry and four in ten are seeing greater consideration of alternative procurement routes/tendering strategies.
Scape chief executive Mark Robinson plans to push the case for mandating margins in public sector contracts, arguing that a fixed agreed figure would give clients greater transparency and contractors could focus on the build without worrying about post-project disputes.
Survey respondents said that typical main contractor overhead and profit margins in the current market are 5.8%, marking the sixth 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.
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