Posted: 20th October
RLF recently surveyed a wide range of Contractors across the UK (see below) and captured their candid and sometimes surprising feedback on the commercial challenges ahead. Of particular interest to Clients will be Contractors’ outlook on material shortages, construction costs, programme delays and how risk might impact tender pricing.
Our full survey results are shown at the end of this article. Here are the headlines:
Materials and Components
- More than 90% of respondents said they were expecting the cost of materials to increase in the coming 12 months, however, only 11% were expecting to see increases greater than 10%.
- Over 75% of Contractors are experiencing or anticipating extended material lead times of up to six weeks, across the board. Plaster and plasterboard products were particularly affected with almost half of respondents experiencing delays. General plant, equipment, timber and aluminium products are also in short supply.
- Almost 90% of respondents believe that shortages and longer lead times will be resolved within the next 12 months.
- Surprisingly, only 21% of respondents intend to stockpile materials to protect against shortages.
Cost and Programme
- Most Contractors indicated that they were anticipating programme delays in the next 12 months, with 55% expecting construction programmes to extend by more than 10%.
- When asked about construction costs, more than 88% of respondents believed that construction costs would increase in the coming 12 months by up to 10%.
- An encouraging 97% of contractors said their Clients were embracing Government and CLC guidance on responsible contractual behaviour in enforcing contracts impacted by Covid-19.
Procurement and Tendering
- Opinion was split equally on whether there will be a shift from two-stage and negotiated procurement to more traditional competitive tendering.
- There was strong consensus (76%) that clients would be seeking to pass greater risk on to Contractors.
- Even more resounding was the concern that competitors will accept additional risk with minimal or no cost uplift to their tender price to gain a competitive advantage, with 93% of Contractors sharing this concern.
Materials and Components: Despite the survey identifying extended lead times and material shortages, there appears to be little intention to protect against this by stockpiling. This suggests that the impact of Covid-19 on materials sourcing and pricing may not be as bad as first feared. The assumption is that Contractors believe they will mitigate supply chain risks by careful coordination and accurate programme planning and sequencing, and that the benefits of stockpiling will likely be outweighed by associated storage costs. Whilst our survey suggests that UK Contractors feel cautiously optimistic that the associated risks are manageable, Clients (and their design teams) should carefully consider the risks associated with materials and products being specified.
Cost and Programme: The expectation that construction costs will rise in the next twelve months may be of concern to many Clients. We recommend that Clients should seek to ensure that their budgets are robustly market tested and contain appropriate risk provision and contingencies to reflect market conditions. Contractors will face the challenge of striking the right balance between rising costs and competitive tender pricing. In terms of programme delays, Contractors must continue to robustly communicate with their supply chain partners and ensure reasonable float levels are included within their building programmes.
Procurement and Tendering: Now that the Covid-19 pandemic is a ‘known event’, Clients will expect Contractors to fully absorb the risk of material shortages, programme delays and potential rises in the costs of materials within their tender prices. We recommend that Clients clearly state within their tender documentation the extent of the risks that Contractors are expected to manage and own, ensuring there is no uncertainty and that Contractors are given the opportunity to include risk premiums, where appropriate.
Market Pulse: Conclusions
It is clear to see that contractors are concerned about competitors buying work and taking on excessive risk to secure a project. Although some Clients may see this as a commercial advantage, reflecting market conditions, we recommend that Clients undertake the necessary due diligence at tender stage to ensure that projects are not being put at risk due to potentially reckless tender pricing strategies by Contractors.
Although construction costs are expected to increase in the coming 12 months, there appears to be a general expectation that tender prices may remain steady, reflecting the fact that Contractors are likely to absorb delays and cost increases to secure the work.
The key to successfully procuring construction works during this pandemic will be engagement and collaboration, so whilst people are physically being kept apart, the key to navigating the constantly changing Covid-19 terrain will be working together.
The survey was concluded in the final week of September 2020 with a panel of 30 large and mid-sized contractors with a mixture of regional and national coverage and a combined turnover exceeding £16bn. One-third of the participants are ranked in the top 20 UK construction companies by turnover.
With thanks to all the participants for taking the time to contribute to the survey.
If you would like to discuss any of the issues in this survey, then please get in touch. We would be happy to help.
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Region: The Midlands
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The full results are as follows:
COVID-19 THE COMMERCIAL IMPACTS ON CONSTRUCTION
Survey Results – October 2020
Materials and Components
Are you experiencing or anticipating any extended lead-in times for material supplies due to the Covid-19 outbreak?
Are there any materials or products that are particularly affected?
If any, what level of lead-in delays are you typically experiencing or expecting?
If applicable, how long do you think such shortages within the construction industry may last?
Do you intend to stockpile materials to protect againist anticipated shortages?
Do you expect the prices of materials and products to increase or decrease in the next 12 months?
Cost and Programme
The Government and the Construction Leadership Council published guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency. Do you believe that clients are currently embracing this guidance?
Do you anticipate that construction costs will either increase or decrease over the next 12 months and, if so, to what extent?
Do you anticipate construction programme prolongation / delays on projects over the next 12 months and, if so, to what extent?
Procurement and Tendering
Do you expect to see clients favouring more traditional competitive tendering procurement routes during the next 12 months, with less use of two-stage tendering and cost negotiation procurement routes?
Over the next 12 months, do you expect clients to favour procurement routes that pass greater risk onto the contractor?
Is there a concern that competitors might accept additional risk with no / minimal cost uplift to gain an advantage?
Do you expect the adoption of more traditional procurement practices and attitude to risk will lead to less collaborative relationships over the next 12 months?