Q4 2021

TPI Survey Feedback


In G&T’s TPI survey, numerous respondents suggested they had seen a market resurgence in the last quarter and pointed to the fact that a number of key projects are lined up to be on site in the next quarter or two. Also observed was a rise in speculative bid opportunities, an increase in the number of requests for proposals (RfPs) and comments indicating that discussions are picking up with clients to restart projects that were mothballed due to the pandemic.

No projects are reported to have been cancelled in the period but some schemes are taking longer to start and may not progress as fast as originally expected until input prices are more certain/fixed. Despite some concerns that overheating in the industry could make some projects unviable, based on the number of enquiries and commissions G&T is receiving, it is evident that workloads are set to continue to increase. There is a sense that momentum is building and pipeline opportunities are beginning to firm up and commit, but in some sectors (eg commercial office) there is still an element of ‘wait and see’ in terms of what occupiers/tenants want from their space moving forward.

Projects that have been through planning are starting to get funding and moving to the next phase of design and procurement. Funders are particularly keen to finance developments with good levels of sustainability and carbon friendly credentials as Net Zero targets are being embraced across the industry.

Respondents added that a number of large masterplanning/regeneration schemes that stalled over the last year are now showing signs of coming back to life, but in contrast work in other sectors, such as hospitality, remains slow due to changed behaviours and preferences. An increasing number of opportunities were reported in both the healthcare and education sectors. Growth in these areas are in response to the UK’s new hospital building programme and the consolidation of existing higher education estates due to changes in working patterns. Workloads in the commercial office sector are also high with significant volumes of tenant-controlled space either being refurbished or repurposed to accommodate hybrid working. There is also strong desire to bring existing building specifications up to standard and in line with tighter energy requirements. However, some suggested that workloads in the commercial office sector may settle down or level off given the fine line between development and tenant demand.

Market Conditions

While the market is busy, it is still reasonably competitive. Market tendering conditions are predominantly being described by contractors as ‘warm’ with moderate competition and tender pricing. However, some sectors such as office fit out are experiencing higher levels of competition which is helping to keep tender prices in check.

With strong pipelines secured and greater certainty of work, Tier one contractors are generally feeling more comfortable and see less of a need to work to tight margins. However, a growing number of challenges and pressures are driving the market - namely labour availability, plant prices, global supply shortages and material price inflation. These ongoing issues generally stem from the following:

  • Demand: A simultaneous global increase in international demand for construction materials and products driven by housebuilding booms, Government infrastructure-based stimulus packages and delayed project starts.
  • Supply disruption: Disrupted raw material supply lines, particularly for imported products. Manufacturers are struggling to ramp up production capacity in response to the rising market and quickly shifting appetites after having scaled down supply during the pandemic.
  • Bottlenecks: Shipping container logistics issues causing supply chain bottlenecks (ie difficulties moving containers that are stuck in the wrong places quickly enough) and haulage issues stemming from a lack of HGV drivers.
  • Raw materials: Most inflation has so far been driven by rising raw material prices. However, with demand so high, some of the recent falls in commodity prices (eg copper, iron ore, timber) have not been passed down the supply chain. Retailers are also still selling inventory bought at higher prices.

Furthermore, accidents (eg the Suez Canal blockage) and weather events (winter storms in Texas disrupting plastic polymer production) have also had a part to play at various points during the year. More recently, rising energy costs have added to the inflationary pressures.

Competition for nearly all resources is fierce. However, if we keep surge pricing to one side, good growth is underpinning reduced tendering competition and higher prices. While it’s possible that this short-to-medium term blip will subside as the supply chain adjusts and constrained supply lines ease, there is a growing concern that this ‘transitory inflation’ will not fall away for all elements and a new base level could be set. The supply chain could take advantage of the current demand-supply imbalance by seeking to retain higher prices rather than returning to previous pricing levels.

Some of the resultant uplift in tender pricing is down to price volatility that is making it difficult to fix trade package prices. The supply chain is understandably nervous about cost movements and is therefore adding significant premiums through higher risk allowances to fix prices for projects starting in 2022 and beyond. Although main contractors suggest that typical risk allowances are in the 2-3% region, allowances of 5% or more in the past few months haven’t been uncommon. Furthermore, the length of time contractors are willing to hold tendered prices on packages has also fallen. In some cases prices are only being held for 24-48 hours, driven by supplier pricing. Difficulties in getting the supply chain to fix prices isn’t something that is expected to go away anytime soon.

Compounding the issues stemming from resource shortages are increased levels of contractor stockpiling, rising workloads and the Government’s commitment to deliver a number of large infrastructure projects. Commitments to deliver some of these major schemes by a certain date will mean that a number of them could come to the market at a similar time, putting additional pressure on already strained resources. Concerns over sub-contractor capacity are also emerging. A surge in activity has created short-term capacity constraints and contractors are feeling increasingly stretched. Indeed, on average, main contractors have secured 94% of their workloads this year but capacity issues look likely to ease in 2022 as just 64% of their workload has been secured.

It remains to be seen how the winding down of Government-backed debt funding and the end of the furlough scheme will impact companies. While construction has the greatest share of insolvencies of any UK sector, the number of annual insolvencies appears to have fallen during the pandemic. Arguably, sector insolvencies have been kept artificially low by Government intervention and support measures but taking these away may result in a spike. Unwinding these support measures could put pressure on finances and cashflow, particularly in an environment of soaring input costs. Zombie companies kept alive by the Government’s support schemes may have been inclined to take on work at wafer-thin margins and could potentially struggle to survive without support measures, particularly if contractual disputes ensue.

Increasing workloads and constrained supply, coupled with labour cost and material price inflation, means that for the time being at least, there is only one direction for tender price inflation.