Construction cost inflation of 10% this year is forcing contractors to concentrate on higher margin work on lower risk projects.
That has seen more focus on the London commercial office market as price growth in the residential sector shows signs of slowing down.
AECOM quizzed BAM, Bouygues, Bowmer & Kirkland, Brookfield, Galliford Try, ISG, Laing O’Rourke, Mace, Sir Robert McAlpine, Skanska, Wates and Willmott Dixon.
The consultant is now estimating 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.
A shortage of key, skilled workers is creating rampant wage inflation across the joinery trade where wages in the fitting-out of prime London residential and office space have risen by much as 15% this year.
The survey found that some contractors are concerned about their exposure to the residential market as London house prices rises show signs of cooling.
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.
AECOM found that some of the main contractors are even now turning down 75% of new business opportunities.
The strong market means that London contractors have on average secured 75% of their turnover for 2016 compared to 70% a year ago.
Brian Smith, Director – Cost Management, AECOM, said: “The industry is taking a far more strategic approach, targeting schemes that will deliver planned margins.
“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.”
John Daly, operations director of M&E contractor LJJ, said: “No-one wants to turn down good jobs, but companies are protecting themselves from financial risk – and rightly so.
“During the downturn, lots of contractors of all sizes were bidding for work that they couldn’t afford to deliver at the price agreed just to keep themselves afloat.
“Many of those that won business at any cost are no longer trading.
“Estimating is a big cost to both principal contractors and subcontractors so, quite rightly, there has to be a commercial decision about where to invest that resource by choosing jobs that are deliverable and profitable, rather than going after any work that’s available.”
