Our head of project consultancy discusses the challenges faced by the construction industry due to the current pressures of our economy.
The Construction Industry is facing its biggest challenge since the banking crash of 2007/8 due to the current pressures of Brexit, post pandemic recovery, labour and material resource issues, economic turmoil, war in Ukraine and poor economic growth have all contributed to the uncertainty of our economy and subsequentley input costs are now rising faster than tender prices, causing the squeezing of Contractor margins. This has resulted in Contractors reducing their price risk exposure and being more selective in the opportunities that are being progressed, the result in the market has been:
- Negotiated procurement.
- Low risk projects (Risk sharing)
- Projects with a higher margin
- Early ordering and stockpiling to beat price rises, resulting in changes to cashflows.
Those commissioning project management jobs continue to seek cost certainty. The result is due to a downturn in confidence, coupled with the higher borrowing costs and credit constraints, clients are deferring and scaling back their development programmes.
Tenders are subject to accelerated acceptance periods (traditionally 12 weeks) reducing to a few days. Tendering contractors continue to protect themselves from the volatility in material prices with these being fixed upon contract award / placing of specific material orders i.e., steelwork.
Unfortunately, problems continue with labour supply constraints causing delays to site works increasing labour costs and delay in delivery of materials all impacting negatively upon cashflows.
It is likely that until confidence in the market and prices stabilise there will be a continued downturn in market activity over the next 5 Quarters.
As a result, in this squeeze, it is likely that the confidence levels will begin to stabilise with contractors looking to increase their project banks resulting in tender costs levelling off to allow some recovery from 3Q2023
| Consultant/ contractor | 2022 | 2023 | 2024 | 2025 |
| Evans Jones | 9.0% | 6.0% | 5.5% | 5.8% |
| BCIS | 9.1% | 5.2% | 4.9% | 4.5% |
| A | 5.5% | 3.5% | 3.0% | 3.0% |
| B | 8.0% | 5.0% | 6.0% | 6.0% |
| C | 7.0% | 3.5% | 2.5% | 2.3% |
| D | 9.0% | 5.5% | 5.0% | 5.0% |
| E | 5.5% | 2.0% | 1.5% | 2.0% |
| F | 9.5% | 5.0% | 4.0% | 3.5% |
Commentary:
Mindful that in real terms tender price inflation is likely to stabilise in 2023/4, coupled with a potential downfall in construction activity, for those with viable schemes, now is an ideal time to push the button on scheme development. Most schemes will take some 12-24 months to progress through planning and procurement. Progressing schemes now ensures that development promoters come to market with “oven ready” schemes when market conditions deliver more stable tender returns and a more settled supply chain.
If you would like to discuss your project requirements, please contact the Project management team at Evans Jones.