Q4 2022

TPI Survey Feedback

Input Costs Tender Price Change TPI Survey Feedback Our forecasts

Workload

From an internal perspective, workloads remain consistent to high across most sectors, but inflation, recessionary risk and rising interest rates pose a threat to output growth which could affect workstreams in 2023.

Some TPI survey respondents noted that current workloads and new opportunities even appear “gravity defying” in light of high cost inflation and against the development appraisals clients are running. While there is little sign of pausing, stopping or let up among many clients, others expect that as their pipeline of work completes over the next year, it is difficult to see workloads being replaced given higher interest rates and ongoing inflationary pressures.

Concerns around viability and rising costs continue to prevent a limited number of projects in the early design stages from progressing. In these few instances, delays stem from prolonged decision making, hesitations around project funding, conversion of contracts and difficulties in gaining relevant planning approvals. Even then, many of these clients are keen to push ahead with early-stage design and are assembling large design teams which shows a good level of commitment. However, the same clients also acknowledge that projects can get switched off quickly if necessary.

The volume of incoming enquiries into the business for short, medium and longer-term projects received over the past few months suggests that for most, workloads will remain high. However, some sectors, such as private residential, are expected to feel the pinch as demand slackens with rising interest rates.

Respondents noted strong activity in the Higher Education sector, with clients’ long-term development plans attracting significant capital investment and producing in a continuous flow of work. There is also positive momentum in the commercial office fit-out market. This is being driven by the expectation that the office working will continue to recover towards pre-COVID levels. Meanwhile there are some early signs of slowing activity in the red-hot industrial warehousing and logistics sector. Rents have not increased at the same pace as land prices and the impact of recent inflation has put a negative pressure on appraisals.


Market Conditions

Our previous TPI survey in June 2022 pointed to an expectation of higher levels of activity and passive tendering over the following six months. While still showing this to an extent, our latest September 2022 survey saw a clear left-shift, reflecting expectations of reduced market activity and more competitive market and tendering conditions.

Persistent and further anticipated inflation, along with growing economic uncertainty, is expected to have a cooling effect on the highly active tendering market that has been seen over the past 12-18 months.

Global supply chains continue to adjust and adapt following the war in Ukraine while the backlog of orders that built up during the pandemic is starting to clear. Both trends should add downward inflationary pressure in 2023 and beyond. G&T is beginning to see more active engagement from the supply chain which implies contractors are beginning to look for new work. Demolition contractors, for example, are hungrier for work which is a potential sign the market is turning. More capacity in the market in 2023 would encourage more competitive bidding.

In an uncertain market contractors will seek to secure turnover, but a strong short-medium term project pipeline will likely create a slight lag effect that will support above-average tender price inflation in 2023. For now, the risk of a potential slowdown isn’t being reflected in the pricing strategies of many contractors and key trades, nor is it likely to do so while contractors have a base level of tendering opportunities to bid on. This is enabling contractors to be selective, picking and choosing projects with the lowest risk profiles and even making it difficult to get contractors to agree to tender on some projects.

The risk of recession, or at least economic stagnation, will affect construction output growth and have a cooling effect on market demand in 2023/24. This will likely bring about a slight shift in contractors’ attitude towards risk, but contractors will still be sensitive towards taking on riskier projects if a protracted downturn should materialise while price volatility persists.

Successive interest rate rises, which at this point appear inevitable, will further tighten the debt market. A reduced willingness to lend and increased borrowing costs would also impact the industry’s growth activity and may make it more difficult for some projects to get funded and past the planning stage. Given this backdrop, a gradual easing in the rate of tender price inflation is expected in 2023 as the contracting supply chain shows a greater appetite to secure work.

With so many moving parts, considering future market conditions has become increasingly difficult – especially as a UK recession is not a foregone conclusion at this stage. A deep and protracted decline in economic growth would likely see businesses cut back on resource and overheads, dampening demand for construction activity. A downturn or shallow contraction (of which there is a greater degree of certainty to happen) would still bring about a squeeze on household and businesses finances, but to a lesser extent.

Over the next six months, market conditions are likely to turn more competitive as projects are potentially put on hold and some projects wrestle with viability concerns. Contractors meanwhile will be partially and temporarily buffered from competitive tendering pressures given their relatively heathy pipelines, but as we move through 2023 contractor workloads may begin to drop off and chasing work could become more commonplace.