Construction firms could be at high risk of insolvency as workload picks up but opportunities for contractors to increase tender prices remain limited, consultancy EC Harris has warned.
The latest Market View Report from the built asset consultants said it expected to see tender prices stop falling in 2011, predicting they will turn a corner in Q2.
However, it warns that firms may have problems delivering schemes that were won with excessively low tender prices at a time when commodity prices are increasing.
The research, based on tender prices in the UK property and infrastructure sectors, points to worrying signs for contractors due to record prices being paid on world markets for copper, energy prices up 15 per cent and reinforcement and structural steel prices up 12 and 10.5 per cent respectively.
Previous research has indicated that the risk of contractor or supplier insolvency is greater in the upturn of the cycle.
EC Harris head of cost research Paul Moore said: “Although we are now expecting tender prices to rise this year, the recovery of the industry is far from certain and could be delayed for a couple of quarters.
“Contractors’ opportunities to increase their tender prices are likely to remain limited and even when workload picks up the worry is the delivery of those low tender priced schemes.”
The consultants said that London is leading the way in terms of recovery in the UK, with tender prices believed to have bottomed out already and forecast to grow by 1.7 per cent by the end of the year, thanks primarily to the commercial office sector.
The report also shows:
- Construction orders figures from the ONS indicate that all new construction orders in London rose by 27 per cent in the first nine months of 2010, compared to the same period of 2009.
- Orders fell by 3.6 per cent in the rest of England and Wales. The rise in London orders was partially fuelled by commercial offices where orders rose by 17.2 per cent compared to the first nine months of 2009.
- The expectation is that London tender prices will have bottomed out in Q4 2010 and will rise by 1.7 per cent in the year to Q4 2011, picking up thereafter to show increases of 3.2 per cent and 3.5 per cent over the following years.
- Away from London and the South East, tender price recovery will be slow and painful with prices not expected to bottom out until Q2 2011.By Q4 2011 tender price inflation is forecast to be just 0.2 per cent, slowly picking up to 2.0 per cent at the end of 2012 and 2.7 per cent in the 4th quarter 2013.
Mr Moore said: “Where contractors have pressurised their sub-contractors and cut their profit margins to the bone to secure workload, rapid increases in costs could mean that contractors find themselves caught out with limited options to recoup their losses.”
The research is broadly in line with previous reports published by EC Harris, who said in February 2010 that London would recover ahead of the rest of the country; however it had said that tenders would continue to fall in 2011.
The firm’s report in July 2010 has indicated that London tender prices would grow faster than the latest research indicates, with EC Harris stating that tender prices would rise by around 3.5 per cent rather than the latest report’s figure of 1.7 per cent.