Six months ago, Mace Cost Consultancy was forecasting tender prices to rise 4% in 2017 and 3.5% in 2018. By April 2016 it was slightly less optimistic, predicting 3.5% growth next year and 3% for 2018. But this was based on the assumption of the UK staying in the European Union.
Now that the UK has voted to leave the EU, everything has changed, even if no one is yet quite sure how.
Mace now says that tender prices will fall 1% in 2017 and remain flat in 2018 because of a slowdown in the demand for construction in the medium term. Brexit might make construction cheaper for clients, therefore, but only at the expense of contractors cutting each other's throats – and perhaps their own.
In London, Mace expects the ongoing pipeline of work to lead to stable prices in 2017 with the softening of demand coming in 2018, leading to a fall of about 1%.
Mace’s July 2016 Tender Cost Update UK report says: “For an industry that was already experiencing a levelling off in demand, the Brexit vote will not help construction, at least in the short to medium term. Many contractors have been expanding and recruiting over the last three years and if order books start becoming harder to fill, competition will increase for the available workload and downward pressure will be put on profit margins and tender prices.
“The extent to which tender prices will be affected is very difficult to predict as there is no precedent for the current situation. We know from past recessions that if the economy slows significantly, or even shrinks as predicted by some commentators, tender prices will fall. We take the view that the UK economy is reasonably robust since the recovery from the last recession, and that there is likely to be a slowing of growth over the medium term but not one that will turn into a major recession. This slowdown will reduce construction workloads, leading to increased competition which will reduce, or even reverse tender price inflation over the forecast period.”
Mace Cost Consultancy managing director Chris Goldthorpe said: “Although we have seen a handful of projects affected by the referendum result due to occupiers reviewing their risks and appraisals, the vast majority of our workload is currently unaffected and contractors and supply chain companies remain busy, particularly in London and the southeast.
“Despite this, we feel that the resulting slowdown in demand will lead to tender prices softening, leading us to revise our forecasts downwards. We believe there’s a strong role for industry to promote opportunities across the country and support mobility of goods, services and labour between the regions. With support from the government and clear local engagement targets for major projects and programmes, this could help bring communities together.”