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.”