Official stats mask extent of industry recovery
According to national statistics, UK construction output has been falling back since October last year. In February 2015 it valued in at £9.7bn, compared to an average of £10bn per month during 2014. But do the figures paint an accurate picture?
Market intelligence and supplier feedback collated by construction consultancy, Gleeds, indicates not. The firm’s latest market survey reports rising construction prices and that tender opportunities are plentiful.
80% of contractors and suppliers surveyed report an increasing number of enquiries, improved turnover and better profit margins. Respondents claim their confidence in the market has been bolstered by increasing client optimism.
The number of tenders currently being priced by surveyed firms:
37% pricing 2 to 5 tenders (-11%)
32% pricing 6 to 10 tenders (+9%)
31% pricing more than 11 tenders (+6%)
Feedback on sector activity supports industry optimism on future workload. The commercial market has been the most active since early 2014, though caution remains around progressing speculative developments.
Similarly, there was a marked increase in the emergence of industrial and manufacturing work encouraged by business expansion programmes.
Although data indicates a drop in residential activity, respondents reports they remain busy building new homes, with plenty of work still coming forward.
This positive outlook is tempered by the reality that the supply chain is finding it increasingly difficult to meet expectations. A continuing workforce shortage is limiting bidding capacity and in some instances the ability to carry out new works. Consequently, some members of the supply chain can afford to be selective about which opportunities to tender for.
Unsurprisingly this can impact on tender pricing. Across the country, Gleeds has seen examples of overpriced bids, designed to either eliminate contractors from shortlists or secure a considerable return.
Sarah Davidson, Gleeds Director for Research & Development said: “As an industry, we should be concerned about the detrimental impact rising costs could have on construction. The reality is if projects become unaffordable, development appraisals no longer show the return needed to make them viable. If capital costs increase, they may not get built.
“Given that we are starting to see the first real signs of recovery from a very long, deep recession, we need to be mindful about the wider repercussions tactical pricing could have.”
The long term risks are client moves towards Construction Management procurement routes, effectively removing the role of main contractor, or a Contractor Funded Approach involving single payment upon completion or 6 months afterwards. The latter is a high risk strategy for main contractors as lending opportunities will be reduced against a weakened balance sheet.
Projects offering a clear scope of works and two-stage tender route remain popular amongst the supply chain, generating greater cost certainty and reducing risk profiles.
Davidson adds: “Supported by the right data and advice, clients will be able to achieve the value they’re after. As long as a competitive environment is created through benchmarking data, value analysis and clear communication, two-stage tendering can be an effective solution for both client and supply chain.”
Jobs & skills
Recruitment in construction is fiercely competitive, with almost 90% of the supply chain looking to expand their business.
Many consider the current resourcing issue to be the result of a problem much bigger than the recent recession. Respondents indicate that more needs to be done to encourage trainees into the industry and in order to do this, investment in training needs to increase.
Davidson commented: “There has been a lot of talk over the years about the skills shortage in construction, and I think the consensus is that we’ve heard a lot about investment in jobs and skills, now we need to start seeing results.”
Gleeds’ survey results indicate that:
Suppliers are receiving payment 30-60 days from the date of invoice
Payment times between public and private sectors are equal
98% consider client payment history to be a major consideration when assessing whether or not to accept repeat business
Over the last 6 months:
88% of the supply chain believe the price of materials has increased (up 4% since Q3/Q4 2014)
Almost all respondents anticipate that material prices will go up over the next 12 months)
60% of the supply chain report no change in material delivery times)
Materials affected by extended delivery periods are:bricks and blocks, cladding, glass, M&E equipment, steel and timber)
The eco-agenda is considered of greater prominence now more than ever. Respondents believe sustainability is given due consideration on most construction projects.
Over the last decade, significant strides have been made to improve the sustainability of UK buildings. Carbon emissions from newly constructed buildings are approximately half what they were 10 years ago.
Mark Pendry, Gleeds Head of Sustainability, commented: “We still have a way to go. Often, too much focus is given to process rather than sustainable outcomes. This change in approach needs to come at the very start of the development process.
“We also need to be looking further ahead than we do. Buildings built today will be in operation in 30 to 50 years’ time, by which point the climate will have changed again. Resources will be more constrained too. We need to be planning for this now - creating buildings that will stand the test of time.”
Sustainability is also increasingly viewed by the supply chain as a way of generating a competitive edge through improved processes, plus increasing profitability and market share.
Sarah Davidson, Head of Research and Development.
Opinion piece first published by Construction News on 13th May
Associate Professor, University of Nottingham