Q1 2023

TPI Survey Feedback

Input Costs Tender Price Change Our forecasts TPI Survey Feedback

Workload

While the rate of new project enquiries may be slowing from that seen in the first half of 2022, existing workloads and expectations for future order books remain strong.

A number of G&T project teams elaborated, explaining that 2023 workloads would likely centre around masterplan works, public sector schemes and opportunities for expansions of current projects. There are also a handful of sectors (for example, senior living, high-end residential, commercial office fit-out and warehousing & logistics) where demand is outstripping supply and where developers have aggressive planning programmes for multiple schemes. These sectors are likely to provide a solid base of workload in 2023 and beyond.

Even sectors that are perhaps more exposed to recessionary conditions, such as the new commercial office market, are still seeing some projects being green lit to commence pre-planning activities and procurement in the second half of the year. Some clients, particularly those with larger schemes are also likely to press on with opportunities regardless of the economic climate given the longer time horizons involved.

Although very few live projects are being paused, those in RIBA stages 2-4 are stalling more frequently amid ongoing upward cost pressures. Survey respondents noted there is a strong sense among most clients of wishing to progress projects but that they were being held back by funders and the high cost of borrowing at present. In the current climate there are also a considerable number of feasibility studies being undertaken. As a result, some schemes will not progress beyond feasibility while others may be scaled back given the dampening effects of recession and high input cost pressures.

Anticipated delays to projects will also have an impact on workloads in 2023. A number of TPI survey respondents observed that some projects requiring Government decisions and sign-off are either not being made or further information is being requested, preventing the project from moving forward. Although the November 2022 Autumn Statement reiterated there would be no cuts to infrastructure project spending and that investment would be maintained in line with the National Infrastructure Strategy, capital budgets were frozen in cash terms until 2027-28 instead of increasing in line with inflation, which effectively means a cut. With rising construction costs and headline inflation in the double digits, these projects will have to do more with less which could potentially cause delays and impact workload. Cost, and how this can be best managed by cost teams, is currently a real sticking point for workload growth.

In summary, while some projects are dropping off there is still a strong amount of bidding opportunities, particularly from stalled 2022 projects, project extensions and additional service requests. Although projects are taking longer to progress to site, a healthy level of requests for proposals (RFPs) from clients suggests the pipeline of new work opportunities is relatively robust.


Market Conditions

Our latest TPI survey shows a slight shift in terms of perceived market conditions over the next six months compared to our Q4 2022 TPI survey. This suggests that those surveyed anticipate slightly lower levels of construction market activity and bidding opportunities, which should ultimately bring about more competitive tendering conditions.

The broad sentiment across the construction market (as well as among those surveyed) is that the rapid rate of input cost inflation has peaked and that material price spikes of late are indeed subsiding. However, some further cost push inflation is expected to come in the form of high energy prices and rising labour costs in 2023. The real driver of market activity in 2023, however, is likely to be the wider macro pressures and a slowing economy.

Widespread forecasts of a protacted recession have put a dampner on demand/appetite for certain projects, impacting client investment plans. Some will be questioning their next steps as they deliberate how to secure funding at the right price in the debt markets. Cheap debt-funded schemes may have become a thing of the past which will inevitably have an impact on tendering activity this year and into 2024.

If, as expected, new order growth does decelerate as we move through the year, contractors will closely review their turnover which may lead to sharper/keener pricing in the market. This may act to soften tender price inflation from various upward pressures as contractors and supply chains take more of a commercial view on elements such as margin and risk allowances. Furthermore, it may prompt some contractors to pivot into different sectors in order to maintain turnover. G&T has seen evidence of main contractors switching focus away from sectors where workloads are drying up or where projects are becoming commercially unviable, to sectors where projects are fully funded with operators that are ready to go (eg senior living projects).

While there are still numerous pockets of strong activity in the tendering market, G&T has noticed a small number of contractors are enquiring about business opportunities more frequently – an indication that appetite to fill order books is starting to increase among some contractors. One of the deflationary pressures identified in our previous TPI report was that project deferrals (and recently completed schemes) would create workload gaps that contractors would increasingly seek to fill through greater competitiveness with regards to on costs. However, with most contractors reporting relatively strong pipelines and levels of tendering activity, this is unlikely to materialise in the immediate future.

In fact, it was noted that several responses to expressions of interest for civils and logistics projects are returning with rejections due to heavy contractor workloads and capacity constraints. As such, there is a prevailing element of contractors being able to “pick and choose” work that suits them best in these more active sectors. While not a recurring theme across all sub-sectors, stretched lead times and work from delayed projects spilling over into 2023 will help prop up construction activity levels overall in the first half of 2023.