London’s largest building contractors turning down one in two bids

London’s largest building contractors are turning down one in every two bidding opportunities amid signs that average construction cost inflation across the capital’s office and residential building bonanza has jumped to 10%.

With construction of London office and residential space now topping pre-recession peaks, contractors are becoming increasingly choosy about which projects they are prepared to bid for, according to AECOM’s 2015 London Contractors’ Survey. The study polled the capital’s largest contractors including Galliford Try, Laing O’Rourke, Sir Robert McAlpine and Willmott Dixon.

This change in the market is also causing parts of the industry to cut back their exposure to the residential market because of fears that the capital’s house price boom may be starting to falter.

“The industry is taking a far more strategic approach, targeting schemes that will deliver planned margins" - Brian Smith, AECOM

The result is growing inflationary pressure on contracts, AECOM warns, with labour and material shortages on the contractor side, combined with an abundance of opportunities on the client side, increasing the risk of an overheated market.

AECOM estimates that construction cost inflation has risen annually by 10% during 2015, with predicted increases of 7% in 2016 before falling back to 5.5% in 2017. Notably, a shortage of key, skilled workers is creating wage inflation across the joinery trade. This is particularly acute in the fitting-out of prime London residential and office space, where wages have risen by much as 15% over the current year.

Constrained by a growing skills shortage and constraints in the supply chain, contractors are now focused on higher margin work provided by low-risk, high-certainty projects, with survey respondents signalling an interest in strengthening their position in the London commercial office market.

The survey found that some contractors are concerned about their exposure to the residential market given the expectation that London house prices will start to cool. Many are now therefore looking at diversifying again into other sectors.

These trends have resulted in a marked year-on-year increase in contractor selectivity over new bid prospects. The proportion of contracts the average contractor declines to consider has risen from one in every three to an average of just one in two prospects during the current year. Some of the main contractors are even now turning down 75% of new business opportunities, the report finds.

The strong market means that London contractors have on average secured 75% of their turnover for 2016 compared to 70% a year ago. By contrast, contractors had won just 40% of turnover for the following year in the equivalent period of the 2010/2011 downturn.

“The industry is taking a far more strategic approach, targeting schemes that will deliver planned margins," said AECOM's director - cost management Brian Smith. "Other considerations increasingly include the reputation of the developer or whether there is any successful prior relationship, as well as the visibility of reliable funding.

“Risk appetite amongst contractors is low, with a desire for certainty meaning that projects may be taken on a smaller margin if the return is guaranteed. In this environment, clients can be confident that the contractors they engage with will be fully committed to successfully delivering a project. Developers do, however, need to consider how they can position their projects to best possible effect to attract and secure interest from the best qualified contractors.”

The contractors that took part in the AECOM 2015 London Contractors’ Survey are: BAM; Bouygues; Bowmer & Kirkland; Brookfield; Galliford Try; ISG; Laing O’Rourke; Mace; Sir Robert McAlpine; Skanska; Wates and Willmott Dixon.

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