Trends
Unlike the large falls in TPI during the “Great Recession of 2008-10”, where falls of -10% were recorded there has been no rush to the bottom and no widespread evidence of buying work yet. Tender prices fell by 2% in the 2nd half of 2020 as contractors sought to secure orders within a slowing pipeline of orders. To obtain work contractors also sought to diversify the markets that they usually operated in, entering new sectors or looking to compete for work among traditionally lower tiers than they operated. Many Tier 1 contractors are claiming that they have secured enough work orders for 2021.
For larger and more complex projects where there are only a limited number of contractors and suppliers capable of undertaking the work, tender prices remained firmer with a limited profit in operation. The main drop off was for smaller, simpler projects where sharp rivalry for securing work drove tender prices down and will drop further, as smaller contractors look to procure work in a smaller marketplace until the pipeline for new orders is stabilised.
Contractors are already facing material cost increases for projects on site. Steel has risen from £700/tonne to £1,000/tonne in the last 6 months, timber has increased due to increased US demands putting margins on currents orders at risk. As a result of the tendering situations margins have been tightened to win projects, despite the need for greater spacing on site.
The pipeline for new orders will return to normal but contractors are still facing anxious times in filling order books for 2022 and 23 as it stabilises. Should the first half of 2021 see a weak pipeline of orders this could reverse the current reported confidence.
The reports of ports being overwhelmed is the result of disruption to the normal global shipping patterns as imports to Europe cannot be offloaded as quickly due to Covid and the need for safe working practices. This has meant that containers are currently in Europe rather than on shipping lanes. The Construction Products Association (CPA) stated that 20%+ of product manufacturers believe material and component supply will be a major constraining activity over the next 12 months.
To limit the effects of delays efficient planning will be essential in order to alleviate delays. Parties should determine what could be pre-ordered / pre-purchased. Placement of orders with long lead in times should be undertaken during 2 stage negotiations together with the possibility of obtaining the materials from a variety of sources.
Parties may wish to consider specific contractual provisions dealing with Brexit related risks such as the introduction of custom checks on non-UK goods entering the country delaying materials and divergence from standards.
TPI Predictions
In the previous CIR our forecast was based on a slow recovery with the UK economy not reaching pre-covid levels until the end of 2023. Whilst we have seen a better than anticipated recovery in the construction sector, it is now clear that the road back to early 2020 levels will be slow with dips occurring.
Tender prices will be affected by increased resource costs, as can be seen by the BCIS revising upwards their building cost indices. There is additionally the need for both the employer and contractor to consider how new risks such as potential divergence in standards meaning that there could be material shortages, labour shortages, together with increasing costs of obtaining performance bonds and insurance for projects.
This is countered by the economic outlook indicating a slow growth back to pre-pandemic levels this will place pressure on increased output costs against the need to secure work and costs driven down, at a time where the investment is still low which will result in continued keen tendering. In the short term the reduced output will suppress the loss of EU workers as UK labour laid off will replace them and keep labour costs low, however once increased growth occurs this will be a major cost driver.
Should the flow of new orders dry up this would force contractors to price at break even or loss-making levels with the consequence of increasing the number of company insolvencies.
With the threat of a double dip recession we anticipate that tender prices will remain subdued throughout 2021 As confidence returns and the pipeline is re-established tender prices will see an improvement from 2022 as contractors will look to re-establish their margins and pass on increasing inflationary pressures once they have secured enough orders.
For this edition of the Construction Intelligence Report we have prepared 3 scenarios for Tender Price, an optimistic upside, central and a downside based on forecasts including building cost changes, the UK GDP, levels of building output from a variety of sources.
In our previous forecast we anticipated a -0.5% fall in tender prices. This time we have revised upwards our forecast with tender prices remaining flat. While tender prices are likely to fall in the first half of 2021 increasing market confidence and an economic recovery beginning in the latter half of the year will lead to increasing tender prices
We recommend the adoption of the central scenario as the most likely route for tender prices to go.
Faithful+Gould also provide global indices for major cities around the world based on input from our worldwide network of offices and publicly available material. Click on the link 2020 Global Location Indices.
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Max Wilkes
Construction Data Manager