London contractors are facing a “scramble for talent” as they look to meet increased demand in the capital which has already seen them secure up to twice the amount of work for 2014 as they had at the same time two years ago, according to a survey by Aecom.
The Main Contractor Market Survey shows the firms have a combined total of 70% of their capacity secured for next year, leading to them being more selective on the projects for which they are prepared to bid.
The survey included Laing O’Rourke, Skanska, Mace, Lend Lease, Brookfield Multiplex and Wates. Greater certainty combined with increased workload and steadily rising input costs means contractors are forecasting tender price inflation of 2-5% a year in Greater London over the next 12 to 18 months, said Aecom director Nick Clare MCIOB.
Aecom itself is currently forecasting 2-4% a year tender cost inflation for the next 12 months, having seen tender prices fall sharply in late 2008 and remain broadly static since then. Aecom is also forecasting tender price rises of 3-6% in 2015.
Commercial development activity, three-month outlook
Clare said he was genuinely surprised by the speed of change of sentiment in the market: “There seems to be a sustained recovery and contractors are building teams up and are swapping resources between companies.”
He also said there was anecdotal evidence of poaching of managers at subcontracting firms by main contractors.
The survey said that the current drivers for construction cost inflation are contractors becoming more selective over projects, shortages of concrete and bricklaying gangs and contractors including more appropriate risk allowances in their bids after years of very competitive pricing.
However, Clare said that clients would not be unduly worried by price increases as long as the value of their properties continued to rise, but those contractors that were able to innovate to bring costs down in two-stage tenders would be at a “significant commercial advantage”. He predicted a return to sharing rewards and greater partnering as clients made more effort to buy in good contractors.
“The property market should not be surprised to see cost inflation built back into contractors’ appraisals for projects. However, this is also a story of two construction industries. Outside London tender price inflation is still relatively flat,” said Clare.
Developers procuring construction work need to set up projects attractively to appeal to the best contractors – a remarkable turnaround given that only six months ago most contractors displayed a hunger for new work.
The survey found that other key considerations by contractors when deciding to tender were:
- The client Contractors are looking for long-term relationships, repeat business and a visible pipeline of workload.
- Competition Contractors will look at what the competition is and bid only against similar-sized companies, especially on single-stage lump-sum contracts.
- Procurement route What is the route with the likely cost to bid measured against the chances of success. Single-stage design and build tenders are expensive.
- Capacity Both in terms of pre-contract/estimating resource and availability of project teams. Single-stage tenders take up more resource which will be a consideration if there are a number of opportunities. With increases in secured work some will turn down an opportunity if they don’t have a project team with the right skills available.
- Tender programme Is the PQQ/tender period sensible for the size and scale of the project, are key procurement stages sequential, how long is the pre-contract period to which contractors are being asked to commit?
- Risk profile In terms of contract conditions and risk being transferred through design, project requirements and contractors will reject single-stage design and build for projects with increased risk.
- Selection criteria Contractors want to know about selection criteria, increasingly they are looking for selection to be based on value as well as cost.
