The only certainties in life may be death and taxes, but for contractors there is the risk of another constant: high costs and low margins.
Turner & Townsend’s latest UK Market Intelligence report revealed that contractors expect the cost of a representative basket of construction materials to rise by a further 5.3 per cent in the next 12 months.
And yet this considerable climb in input costs isn’t yet translating to tender prices. Rather, contractors expect tender prices will increase this year by a more restrained 2 per cent in real estate and 3.7 per cent in infrastructure.
After a shaky start to the year, the UK construction market has found itself on a firmer footing, with order books filling up fast. But the road to Brexit is still unclear, and the lack of market confidence to invest in new projects is serving to suppress activity levels and tender price inflation.
This is particularly acute in London, where the majority of contractors (54.9 per cent) describe tendering conditions as lukewarm – with slack demand and stiff competition forcing many to keep a tight rein on costs.
What’s happening in the capital has implications beyond the M25.
London often acts as a bellwether for other UK regions. Given that many regions have been outperforming the capital over the past year, this trend is potentially worrying.
More than a quarter (26.8 per cent) of London contractors say the construction market is cooling, as investor paralysis freezes output and sentiment. How far this chill may be felt across the country in the coming months remains to be seen.
“Clients need to be aware of what’s going on beneath the surface, and the level of stress and strain on their supply chains”
But what is clear is that contractors are increasingly finding themselves between a rock and a hard place – with margins being squeezed from both sides. Subdued investor demand means they have to bid low to win projects, while the long-term skills shortage is pushing up labour and input costs. And the prospect of losing access to EU workers post-Brexit will only intensify this skills shortfall.
At a time when the industry needs to be innovating and investing in new technologies to build better and faster, these twin pressures are strangling supply chain capacity and productivity – as well as increasing clients’ exposure to risk.
It’s all too easy to categorise this alluring combination of temperate tender price inflation and high levels of competition as a client’s market. But clients need to be aware of what’s going on beneath the surface, and the level of stress and strain on their supply chains.
Clients ultimately need to strike the right balance between supply chain scrutiny and engagement – adopting not only robust project controls but also a more collaborative way of working with contractors to tender intelligently and distribute risk fairly.
As we navigate these ever-shifting sands of Brexit, the fortunes of clients and contractors are more closely shackled together than ever.
Paul Connolly is managing director of UK cost management at Turner & Townsend