Coronavirus will push construction tender prices down by 4% in London and 3% regionally, with further deflation expected in 2021.
That’s according to consultant Arcadis, which has downgraded its tender price forecast for this year as the risk of disruption from covid-19 to the industry lingers.
Arcadis said that now that most construction sites are operational, productivity has recovered better than expected, ranging from between 70%-90% depending on the sector and the stage of the project. This has contributed to the lowering of prices, edging the balance of the industry closer towards deflation and offsetting some of the initial inflationary pressures from extended programmes and different ways of working.
This had brought the industry to a “turning point”, Arcadis said, with prices having risen ever since 2014, despite profitability barely recovering.
Arcadis warned that with Brexit and changes to labour markets approaching, contractors and their supply chain will continue to take a “risk-averse” approach to business development – focused on quality work rather than work at any cost. However, this presented an opportunity for clients who are ready and able to work with their project teams to bring forward “de-risked and deliverable” projects.
Long-term prospects bullish
Arcadis added that it was “bullish” over the longer term, despite looking pessimistic over the medium term. Tender price inflation has been forecast at 5% for 2024/25, reflecting not only the size of the potential pipeline, but also the long-term contraction of the UK labour force.
And increased sensitivity to risk among both clients and contractors is likely to be seen in higher hurdle rates on investment returns, more demanding contract terms and greater project selectivity, which in turn will determine how many projects will proceed, and how quickly they will start.
Simon Rawlinson, head of strategic research at Arcadis, said: “Clients are reconsidering their business needs, with risks around lower productivity, future covid-19 disruption to works, and supply chain resilience all having the potential to cause delays and increases in costs. We need a different approach, not just to make sure that projects succeed, but also to ensure the long-term health of the sector.
“Looking at the wider industry, a successful rebound will depend on urgent, short-term actions – such as longer site operating hours, extended planning consents and prompt payments – combined with strategic longer-term thinking. Small steps will enable gradual progress towards ‘bigger’ tasks such as rebooting apprenticeships, embedding digital technologies, or exploring more collaborative business models and contractual terms. We have a real opportunity here to strengthen the collaborative spirit of the industry as well as enhance procurement. This will have the benefit of increasing transparency as well as embedding some pragmatic thinking into contracts to increase overall project resiliency.”