Low bids forcing contractors into 'race to the bottom'

Lowest-price tendering is forcing construction contractors into a “race to the bottom” which could lead to more firms collapsing, according to a report.

In its Audit Insight report into construction, ICAEW warned of a unsustainable procurement culture, with construction firms pricing their work at unrealistically low levels and possible serious consequences for the industry.

The guide aims to help contractors choose projects correctly and price their work at a sustainable level. It highlighted the key challenges companies face in a sector it dubs “fragile... with low margins and high risks”.

While the construction sector contributes more than £110bn per annum to the economy (6% of GDP) and employs more than 2.4m people, even the largest firms can be “just a few contracts away from slipping into the red”, the report said.

Additional pressures have been placed on the industry by the longest decline in bank lending for construction companies since 2011.

Andrew Hobbs, chair of the Audit Insights construction working group and EY partner, said: “Clients are often only looking for the lowest bid, which in turn encourages construction companies to offer unsustainable low prices in the hope that some aspect of the project will subsequently change to improve their profits.

“Unexpected changes can then turn small profits into losses and make it difficult to return a particular project to profitability.”

One recommendation in the report is for contractors to be more selective over which projects to bid for and ensure that they properly understand the risks.

It is essential for contractors to get the price right at the tendering stage.

And while some companies have become better at pricing their services realistically many businesses are bidding at too low a price for large complex contracts.

The report recommends firms bidding for contracts consider a checklist including risks, technical skills, anticipated costs and contract expertise.

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