Problem contracts, sub-price tendering and low margins have formed a potent recessionary hangover. But is the worst finally over?
‘Problem contracts’ have been a recurring themes of major contractors’ financial results in the wake of recession, having been blamed for losses at Balfour Beatty and Vinci in recent years to name but two.
In some cases these problem jobs are the result of firms bidding at unsustainable levels and below cost, meaning there is very little profit margin to be made and even less margin for error.
As the industry has grown following the downturn, some have taken steps to absorb the lessons learned – Balfour Beatty offering one such example, having implemented a strategic plan in an effort to ensure similar problems do not arise again.
However, data from consultancy Leading Edge suggests construction companies are still witnessing unsustainable bidding practices.
According to the firm’s Construction Industry Barometer for April 2016, 62 per cent of respondents – primarily contractors – cited aggressive sub-price tendering from competitors as a major barrier to winning work over the coming 12 months.
Cross-referencing with previous data suggests the problem is actually getting worse, not better.
In Leading Edge’s previous barometer in October 2015, only 44 per cent of firms identified sub-price tendering as a significant issue for the coming year.
Sub-price tendering is now the top barrier to winning work for contractors, according to the latest barometer, whereas last October it had been a lack of resource to meet demand at the top of firms’ concerns.
“The survey shows how competitive the regions still are”
Mel Budd, Leading Edge
Leading Edge managing director Mel Budd says this phenomenon is clearest at a regional level, where markets are still fiercely competitive.
“Most of the respondents to the survey who cited sub-price tendering as their biggest barrier to work were based outside of London and the South, which shows how competitive the regions still are,” he says.
“But the big issue overall is costs. Since costs have increased so much, even a bid at the same price as a year ago will have a smaller profit margin on it now, meaning that sub-price bidding is still a problem.”
However, for companies in London and the South, the threat of a possible Brexit is far more prominent for contractors, with most citing that as one of their major barriers to growth over the course of 2016.
Prospects for London have fallen as a result: in October’s barometer, respondents expected sales in London to grow by 8 per cent over the subsequent six months, but the equivalent forecast has dipped to 5.3 per cent in April’s survey.
Similarly, growth prospects across the South and East of England have dropped from 6.5 per cent to 4.8 per cent over the same period.
Although these two regions are still expected to be the fastest growing in the UK, Mr Budd argues that these are clear warning signs.
“Both regions are hotspots for international investment, particularly for commercial schemes, and these results could be a reflection of clients holding back schemes until after the referendum in June,” he says.
Outside of London and the South, the impact of fears over a Brexit has been much narrower, Mr Budd says, with fewer respondents citing it as a barrier to work.
“It could be a case of clients holding back schemes until after the EU referendum”
Mel Budd, Leading Edge
Consequently, growth expectations have been relatively stable. The latest barometer shows firms expect 3.1 per cent growth in the Midlands and Wales over the next six months, almost unchanged on the equivalent forecast of 3 per cent back in October.
The North of England’s growth expectations are similarly stable, with forecasts standing at 2.9 per cent in April compared with 3 per cent in October.
The survey paints a picture of two separate markets divided by two main concerns: London and the South faces a commercial-driven market with high demand and fears over the EU referendum, while the rest of the UK is struggling with aggressive tendering and fierce competition.
However, overall, Mr Budd says the picture is “still a positive one, despite some market challenges”.
More than half (56 per cent) of companies still have a positive business outlook for the next six months, down only slightly from 62 per cent in October’s barometer.
Only 14 per cent of respondents were ‘fairly unconfident’ that sales would grow in the coming six months, while 36 per cent of respondents were ‘fairly confident’ of sales growth over the same period.
Sales among the firms surveyed grew by an average of 6.3 per cent in the previous six months – the third highest rate on record – while the sales outlook index, which weighs firms with a negative business outlook against those with a positive outlook, hit its fourth highest level on record.
“It’s an overall picture of growth,” Mr Budd says. “There are still plenty of reasons for businesses to be positive.”
The increase in sub-price tendering should be a concern for the market and steps need to be taken to make sure the mistakes of the pre-recession boom are not repeated.
Contractors feel there is plenty of work on the way and are confident of business growth – but need to keep one eye on margins and sustainable bidding if they are to take full advantage of opportunities.
Leading Edge sales forecasts Apr 2016_UK heat map by regions
Source: Leading Edge