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Mon June 27 2022

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Contractors wary of London after inflation jump

2 Feb London’s largest building contractors are turning down one in every two bidding opportunities, according to a survey by construction consultant Aecom.

Aecom says that tier one and tier contractors are becoming more selective about which projects they are prepared to bid for and are focussing on providing value more than price. Order books are strong for 2022, but last year’s jump in inflation caught contractors off guard, according to Aecom’s London Main Contractor Survey 2022.

The survey found that building cost inflation in 2021 rose almost four times higher than contractors had predicted. And with building cost inflation outstripping tender price inflation, contractors’ margins were inevitably hit.

As a result, contractors’ estimates for inflation in 2022 have gone up – averaging 4.2% compared to their prediction of 1% at the beginning of 2021. According to the study, this outlook will be reflected in bids, with contractors and their supply chain pricing in the risk of higher costs.

Last year the rate of tendering opportunities – the number of tenders invited to versus number of tenders submitted – was 49%. Similar rates have not been seen since 2016. (See graph below.)

In 2020 tier 1 contractors were willing to consider tier 2 projects as they chased turnover; but as opportunities picked back up in 2021 this trend abated, says Aecom. As contractors became more selective, their strike rate improved, winning 33% of opportunities in 2021, up from 23% in 2020.

Rate of tendering opportunities by main contractors (tenders invited / tenders submitted)
Rate of tendering opportunities by main contractors (tenders invited / tenders submitted)

All contractors surveyed expect to increase revenues in the next two years. According to the study, order books are almost full for the year ahead and tier 1 contractors are already at 48% capacity for 2023.

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The most cited strategy to secure work in 2022 is developing and nurturing relationships with targeted clients to develop repeat business.

While Covid-19 continued to have a strong impact in 2021, the pandemic is no longer a new problem and the associated risks are priced into jobs. In contrast, Brexit is perceived as a bigger risk factor in 2022. Import and export duty has risen, lead times have jumped due to the delays and paperwork associated with material coming in from Europe, and reduced availability of labour is driving up the cost of good labour.

The survey found that 32% of respondents are experiencing significant effects from Brexit, with 58% reporting minor effects.

An uncertain supply chain and trade contractor market means that the trend for two-stage and two-stage hybrid procurement models continues to rise, representing 71% of tier 1 contracts in 2021. Contractors are feeling risk averse, and the result is a move away from single-stage fixed price contracts.

Brian Smith, Aecom’s head of cost management and commercial for UK and Ireland, said: “Despite higher inflation and continued volatility associated with global factors including Covid-19 and Brexit, our survey shows that London’s leading contractors have a positive outlook for the next two years. With filling order books and an expected busy market, they have good reason to feel buoyant.

“Contractors in the capital are leaving the unpredictability of the pandemic behind them and are now focused on building longer-term relationships with trusted clients. We’ll see a move towards more two-stage hybrid and negotiated tenders this year as contractors look to engage with clients as early as possible to ensure that any risks are quickly identified. There is a much more considered approach to pricing, procuring and executing projects and a strive for more collaboration. In 2022, price is no longer the key metric of value.”

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MPU

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