'Be alert for signs of contractor distress'

20 April 2018

Construction clients have been warned to be on the alert for any signs of contractor distress in the wake of Carillion’s collapse.

Turner & Townsend’s 2018 UK market intelligence report for the first quarter of 2018 said clients needed to achieve a delicate balancing act with their contractors and that the most astute of them would monitor, support and collaborate with suppliers in equal measure.

“In practical terms, this means rerunning credit checks and challenging suppliers on their ability to continue delivering, while also seeking to understand and allay their concerns,” the report said.

It said clients’ success in determining contract financial health would depend on an empirical analysis of each supplier’s added value and expertise in the management of the whole supply chain down to tier three suppliers.

“The aim should be to establish the financial robustness of the supply chain while also strengthening relationships within it,” said the report.

Turner & Townsend urged clients to work collaboratively with the supply chain and to “put an arm around their contractors while at the same time keeping their eyes open for any sign of weakness”.

Looking ahead, clients would need to tender intelligently and work collaboratively as contractors in many regions faced a perfect storm of weak demand and compressed margins.

Turner and Townsend’s latest regional inflation forecast suggested tender prices will rise only slowly across most of the UK in 2018.

London, which has seen the fastest tender price rises in recent years, is expected to see an easing of inflationary pressure. Average tender prices in the capital are forecast to rise by just 1.7% in 2018.

However the size and diversity of the London market means it will see substantial variation depending on sectors. While residential construction in the capital remains buoyant, boosted by strong client demand and with labour shortages firing rising tender prices, public sector demand has cooled.

Even the UK’s hottest regional markets, such as the West Midlands, North West and South West, will see subdued price inflation with increases of 2.3%, 2.2% and 2.1% respectively.

Turner and Townsend added that the modest increase in tender prices was likely to keep the pressure on a supply chain that is already seeing its margins squeezed by skills shortages and high material cost inflation.

It said that figures from the third quarter of 2017 showed that 44.5% of the capital’s construction workers were born outside the UK, according to the ONS Labour Force survey.

“Such heavy reliance on imported skills would be a huge liability if Brexit were to trigger an exodus of foreign workers,” said the report.

Unemployment in the construction sector as a whole is sitting at a historic low of 1.9% meaning the industry is effectively at full employment and London contractors could face intolerably high wage pressure.

The report also urged clients to be wary of viewing the current buyers’ market as a pretext for demanding single stage tendering in all cases.

It said that while it could be tempting for clients to flex their muscles as contractors scramble for business this could pose long-term risks for the client.

The report said it was likely that when the collapse of Carillion was better understood, one of the seeds of its destruction was likely to be its willingness to take on excessive project risk.

It added that while Carillion’s vast scale made it a special case, government statistics show that 2,633 construction companies in England and Wales became insolvent in the 12 months leading up to September 2017.

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