Cost increases for construction materials and labour are expected to outstrip tender price rises in 2019, placing more pressure on contractors’ margins.
That’s the warning to come out of the latest UK market analysis by Turner & Townsend, which has suggested that insolvencies could rise.
It found that contractors expect tender prices to increase by 2.9% in 2019, compared to increasing materials costs of 5.3% and rising labour costs of 4.5%.
Only 28.4% of contractors expect the market to improve, against 42.1% prior to the Brexit vote in Q1 2016.
Official data shows that construction witnessed the highest insolvency rate of any UK economic sector in past year, with 2,924 insolvencies recorded in the 12 months to the end of September 2018. This figure stands 28.8% higher than the struggling retail sector, it warned.
Turner & Townsend attributed the cause to weakening demand in construction. Despite a 3.4% rise on the previous quarter, new orders in Q3 2018 were down almost a third (30.8%) on the high levels seen in 2017.
As a result, Turner & Townsend’s latest report found that half of contractors (50.5%) surveyed were experiencing “lukewarm” tendering conditions, reporting increased competition and moderate price growth.
With fewer new tenders available and competition increasing, many contractors have been forced to absorb the impact of these rising input costs and compromise on margins. Turner & Townsend’s analysis shows median margins for tier one contractors standing at 3% and 5% for tier two contractors.
Since the start of 2016, median tier one margins have shrunk by a quarter and tier two margins by half, it estimated.
Paul Connolly, UK managing director of cost management at Turner & Townsend, said: “A decade on since the global financial crisis clients must remain vigilant against the chill winds of insolvency. 2019 is by no means 2009, but a year on from the collapse of Carillion and at a point of significant uncertainty in the Brexit negotiations, contractors and clients need to have their eyes on the pressure points that could push parts of the supply chain to the edge.
“So much rests on the Brexit withdrawal agreement and there remain risks of further decreases in demand, coupled with increases in the costs of materials and labour from the continent and elsewhere. Contractors’ already-thin margins could clearly come under further pressure.
“It’s essential for clients to be proactive about these risks – monitoring for warning signs, undertaking wide-ranging due diligence during procurement, and using project controls to pre-empt and correct problems at an early stage. It’s about checking and challenging the supply chain, but also collaborating – understand suppliers’ pressures and concerns, as well as holding them to account.”
