TPI Survey Feedback

Workload

At G&T, we’ve noticed a strong uptrend in requests for proposals and project leads in the past two months as more clients commit to their investment strategies. A number of projects are also restarting, moving forward to delivery phases, but some are still being delayed by clients waiting for their business plans to be signed off with confidence and move forward into procurement. Upward pressure on costs could slow the progress of getting projects to site as clients become more wary to commit. This could result in new workload dropping in Q3.

Although the pipeline appears to be steady with the number of project opportunities increasing since lockdown restrictions began to lift, some sectors have been driving the improvement in activity more than others. We have seen a number of opportunities in the logistics, masterplanning, commercial refurbishments, senior living, PRS and healthcare sectors. Many of these are now in planning/pre-planning and will move into full construction over the next six months.

Education clients are also starting to think about projects now that they are some way towards being fully operational again. There is currently another round of amalgamation in the further education sector which will lead to rationalisation of estates. Many higher education (HE) clients are undertaking reviews of their estates, considering how they need to respond to post-pandemic working and adapt their teaching environments.

Current workloads in the retail and hospitality sector indicate that these two sectors are struggling to recover. Reduced revenues have meant that there is less money to spend on capital projects. It’s also proving difficult to secure funding for new commercial office projects. Some schemes are moving slowly through the design stages due to caution over funding, but the lifting of restrictions and the return to the office will help focus occupiers’ minds on the quality of space and highlight the limited supply of new build/refurbished office accommodation.

Market Conditions

Market conditions and pipeline prospects have generally improved in most sectors but some projects are still taking longer than usual to reach site due to movement in contractor pricing – a result of the current material price volatility/inflation – and also funding challenges.

Some clients and investors have decided to sit tight in light of the current market volatility, hoping that some of the inflationary pressures will ease towards the end of the year. Our expectation is that this is a short-term spiking of prices caused by supply compression and unprecedented demand. Many expect that supply and demand conditions will begin to normalise in the second half of 2021, reducing the current inflationary pressures. In the meantime, contractors are ensuring that fluctuation clauses that cover the situations associated with the current volatile price movements are being included in their construction contracts. Given the historically low levels of inflation seen in recent years, such clauses may have been ignored or even deleted from contracts and so many contractors are paying particular attention to these, making certain that they have a good understanding of their practical application.

With an improved project pipeline and increasing new order levels as a context, some contractors (notably tier one) have been less willing to absorb cost increases and this has started to feed through into tender returns. Tier three and four contractors/sub-contractors are still being very competitive with pricing, but tender returns from tier two contractors and above are less competitive. Such contractors can, perhaps, afford to be more risk averse in their bidding activities, only bidding on projects with lower risk profiles rather than ‘prestige’ projects. On a recent £50m project, more than 20 contractors were approached at prequalification but only three agreed to tender.

Bidding-resource has become increasingly stretched for many contractors as workload pipelines have grown. This supply-side capacity constraint – largely a result of buoyant new order growth and a faster-than-expected recovery - is putting some upward pressure on pricing. Spare capacity for shovel-ready projects has been closing rapidly and those that delayed are likely to have increased their exposure to significantly higher construction costs than planned or budgeted for.

There continues to be an element of ‘trading up’. Mid-tier contractors (who don’t typically compete with larger contractors) continue to bid for more high-end work and are often more competitive with their pricing, outcompeting larger tier one contractors. However, as the recovery broadens and the worst affected sectors (eg hotels and hospitality) begin to show increasing signs of life and returning trade, the trend of trading up should recede.

Some sectors will see drastic changes as the economy swings back into action, operating in a very different way than they were pre-pandemic. As new working practices bed in, commercial investors may proceed cautiously for a period and choose to focus on re-fit, repurposing (eg retail to office) and refurbishment projects rather than entirely new schemes. Many are keen to retrofit their existing space to meet new environmental standards and carbon emissions targets. However, there is still strong demand for new, high-quality prime office space, particularly space with good environmental, social and governance ratings.

Inflation will be driven by sectors where activity is expected to expand rapidly (eg higher inflation in infrastructure, less in retail) but all sectors will be hit by the rising material prices in the short-term and the potential skills shortage issues beyond this.