TPI Survey Feedback

Workload

On the whole, most of those surveyed reported continuing opportunities and a busy market. Workloads on some existing projects are being affected by the challenge of bringing project development costs within budget and the need for additional time to work through value engineering – a consequence of hyper-inflation. Higher workloads are involved with schemes pre-contract to ensure they work and are still viable for clients. Also, the time between successful bid to project start is extending, primarily because contractors do not want to become trapped in loss-making, fixed-price contracts and clients want to reduce their exposure to the market (as well as potential supplier bankruptcies).

The recent compounding inflationary pressures and market volatility has resulted in some jobs stalling (or even being ‘mothballed’ if their viability has been impacted), but generally the project pipeline remains strong and there are a large number of enquiries that could be converted into projects in the medium to long-term. Interest in the early stages of projects (RIBA stages 1 and 2) remains particularly robust, but some of those surveyed said that a small number of the major projects they are working on are being delayed or paused for a period until an element of cost certainty is seen.

While there is some nervousness around inflation, new opportunities continue to present themselves and older projects are also coming back to life. The UK Government is going through a major infrastructure investment programme to replace aging, end-of-life assets and its recently published Energy Sectary Strategy will create new opportunities for work in nuclear, offshore/onshore wind and solar. However, turning positive and proactive intent into the delivery of these often-complex pipeline infrastructure projects will take some time, so this is unlikely to be an immediate shot in the arm for the construction industry.

Market Conditions

Brexit, the pandemic, the energy crisis and the war in Ukraine are having a compounding effect on the market. One saving grace is that suppliers are getting better at managing supply chain disruption using new processes and systems.

Around 1.25% of construction products imported into the UK originate from Russia or Ukraine. While not a significant amount, the UK Government has added a 35% tariff on most building materials imported from Russia. This has invariably had an impact on the prices of those material prices supplied directly to the UK from the region, but it has been the wider impact to global supply and demand and global market conditions that has been most damaging.

Prior to the war in Ukraine, we had hoped inflation would begin to recede after showing signs of levelling off towards the end of 2021, but subsequent moves higher in commodity prices has brought us back to the drawing board.

As the Ukraine effect filters through, strong upward price pressure has impacted project budgets, in some cases pushing projects over budget. Many TPI survey respondents expect huge initial hikes in costs, primarily concentrated in Q1 and Q2, but followed by a subsequent cooling off or normalisation period. However, the supply chain will likely try to benefit from these abnormal conditions for as long as possible, particularly if tendering activity remains high, so it is very difficult to pin a timeline to any easing of tender price inflation.

Inflation on key trades has jumped which has impacted tender returns. Additional risk pricing is also being applied due to the level of uncertainty which is deterring most contractors from fixing prices and taking on inflation risks. Most respondents do not expect inflation to ease significantly anytime soon, but the reactive market will stabilise as supply chains diversity. Other avenues for supply are already emerging (eg importing semi-finished and finished steel from China or oil and gas from Saudi Arabia) and this will ease input cost pressures.

Viability concerns may shelve some projects or cause delivery issues in the coming months. If this drop in demand materialises, one potential consequence would be increased tendering competition, prompting some contractors to change their views on risk and bid more competitively. According to a number of survey respondents, this will initiate a price correction process. However, even when the 'correction' commences, contractors’ short-term order books will still be relatively full, and it is likely that the effect on tender prices will not materialise until 6-12 months later once contractors become more active in looking for work.

Increases in material and material supply costs, prolongation of lead times, increased project risks, and greater difficulty in securing fixed priced tenders are all issues we expect to see in the market in the short-term. To what extent client capital expenditure plans and projects are consequently put on hold or paused largely depends on the longevity of the current market pressures. A short-term conflict will likely mean short-term pricing spikes while a long-term conflict will result in sustained high prices with increased issues for project viability and delivery. Clients will be more inclined to proceed once early indicators suggest inflation has peaked and is starting to subside.