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Mon August 19 2019

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Cost consultant warns on margin pressures

17 Jan A year on from the collapse of Carillion, construction companies are facing even greater market pressures of rising costs and falling demand, warn costs consultants at Turner & Townsend.

Official data show that construction witnessed the highest insolvency rate of any UK economic sector with 2,924 insolvencies recorded in the 12 months to the end of September 2018.  Construction’s insolvency rate is 29% higher than the struggling retail sector, whose difficulties receive much media attention in the national press.

According to Turner & Townsend, the underlying cause is weakening demand in construction; despite a 3.4% rise on the previous quarter, new orders in the third quarter of 2018 were down more than 30% on the high levels seen in 2017.

As a result, Turner & Townsend’s latest UK market intelligence report finds that half of contractors (50.5%) surveyed were experiencing lukewarm tendering conditions, reporting increased competition and moderate price growth.

Nationwide, contractors expect tender price growth to be 2.9% in 2019.  This inflation figure is being held up by the rising cost of materials and labour, expected to increase by 5.3% and 4.5% respectively in 2019.

With fewer new tenders available and competition increasing, many contractors have been forced to absorb the impact of these rising input costs and compromise on margins.  Turner & Townsend’s analysis shows median margins standing at 3.0% for tier one contractors and 5.0% for tier two contractors.

Since the start of 2016, median tier one margins have shrunk by a quarter and tier two margins by half.  At a time when Brexit uncertainty remains high, this ongoing squeeze is creating a heightened risk of insolvency in the market.

While the pressures created by easing demand and modest level of wider economic growth remain modest when compared to the extreme pressures of the global financial crisis of a decade ago, Turner & Townsend advises organisations to ensure they are prepared for potential supply chain distress.

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Paul Connolly, UK managing director of cost management at Turner & Townsend, said: “2019 is by no means 2009, but a year on from the collapse of Carillion and at a point of significant uncertainty in the Brexit negotiations, contractors and clients need to have their eyes on the pressure points that could push parts of the supply chain to the edge.

“So much rests on the Brexit withdrawal agreement and there remain risks of further decreases in demand, coupled with increases in the costs of materials and labour from the continent and elsewhere.  Contractors’ already-thin margins could clearly come under further pressure.

“It’s essential for clients to be proactive about these risks – monitoring for warning signs, undertaking wide-ranging due diligence during procurement, and using project controls to pre-empt and correct problems at an early stage.  It’s about checking and challenging the supply chain, but also collaborating – understand suppliers’ pressures and concerns, as well as holding them to account.”

Turner & Townsend’s UK market intelligence is available for free at www.turnerandtownsend.com/en/insights/uk-market-intelligence-q4-2018

Got a story? Email news@theconstructionindex.co.uk

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