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Small contractors slash tender prices

A two-tier construction economy is emerging in which smaller firms are reducing tenders to dangerously low levels, according to a new report.

The latest Construction Cost Update Survey from internationally respected consultancy Rider Levett Bucknall warns that desperate competition between some smaller contractors and their supply chains could lead to insolvencies.

Meanwhile, it says larger contractors with more work in the bag have been able to maintain higher tender prices, keeping them healthy.

The report says: “RLB reports that it is witnessing the development of a two-tier construction economy.

“Some of the larger, financially stable contractors with relatively secure long term order books are only reducing tender costs by modest amounts. Smaller contractors and supply chains are competing harder for what work remains.

“This increased competition is producing lower prices, some of which may prove unsustainable over the contract period. This may result in increased insolvencies of small to medium sized contractors and their supply chains.”

RLB’s report shows varying levels of tender price reductions across major UK cities in the first three months of 2009, with Birmingham seeing the biggest price drops.

The consultancy predicts average UK tender price deflation of at least 7 per cent in 2009, with a further 3 per cent across the country next year.

The cost consultant then predicts the UK will once again start to see tenders increasing in price in 2011.

Meanwhile the RICS Building Cost Information Service is forecasting a 5 per cent drop this year and the same amount next year, with a 2 per cent drop in 2011.

Results of a survey out this week from the Scottish Building Federation revealed a growing number of firms operating on “razor thin” margins, risking quality and safety standards.

Two-thirds of the 700 firms responding to the survey indicated that their latest contracts were typically secured on the basis of a margin of 3 per cent or less.

More than one firm in three is typically operating on a margin of 2 per cent or less, while more than one in seven has seen its margins cut to 1 per cent or below.

SBF chief executive Michael Levack said: “The competitive pressure on many SMEs at the moment is immense.

“In the public sector, we’re seeing upwards of 10 firms being invited to tender for each new contract. Indeed, I’ve heard certain cases of recent local authority tender lists which have run to more than 20 companies, which is frankly ridiculous.”

National Federation of Builders communications director Kurt Calder agreed that tenders were being forced down to “unsustainable levels”.

“People are quoting silly prices in order to buy work,” he said. “In some cases firms are signing contracts that are effectively equivalent to signing their own suicide note.”

Readers' comments (2)

  • After many years of running my own electrical Contracting Company,with a staff of 15 and an order book until December 09, due to the downturn I now find that I have had to lay everybody off and start looking for work myself as an "employee".
    I have now even dropped my salary rate ! ! !

    As an employer I used to work on a 20% markup,so in light of this letter written by Nick Whitten I fully understand.

    What puzzles me is,if Companies are reducing their quotes for the client, then the client rents out the property or whatever,we can all see who is making te money off OUR backs.

    Why is the Government not stepping in and purchasing all (or a lot of ) the derelict land which in turn will have a knock on effect to everybody down the line from the following:-

    * Surveyors

    * Groundworkers

    * Civil workers

    * Shuttering Joiners

    * Concreters

    * Steel Erectors

    and so and so and so

    Dont forget the Plumber,Electricians,Joiners etc,etc,

    Not forgetting:-

    All the wholesalers

    All the firms that go to supply them

    That then kicks in the following:-

    Estate Agents,because will now have money to move

    Removal firms

    Cant use the surveyors because they are now to busy working on all the new stuff.

    I believe it just needs one little push, then all these low quotes will evaporate

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  • Worked for a specialist joinery and construction company. Big contracts, big profits. Withing a very few years, the big contracts were going to the bigger companes and ours company like many others around us either closed or forced into smaller and smaller jobs and margins. On one memorable occasion, we were doing drawings and estimates for a 12 x 8 garden shed.

    Writing on the wall at that point, company taken over. Almost all of us were redundant, takeover company in different field of play. In my humble opinion, they were looking for possible leads built on our erstwhile good name. Although I no longer work within the industry, word of mouth tells me this is not happening. Small crumb of comfort.

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