According to cost consultant Aecom’s latest London Main Contractor Survey, strong order books are allowing firms to be much more selective about the projects they bid.
This is allowing firms to pursue strategies focused on providing value beyond price, favouring two-stage and negotiated work with clients.
Tier 1 contractors are turning away from single-stage contracts after getting burnt on pricing during the volatile period of inflation during the pandemic.
The survey revealed two-stage and two-stage hybrid procurement models represented 71% of Tier 1 contracts last year as getting involved on projects as early as possible proved the best way to mitigate the impacts of raw material costs and labour shortages.
The consultant’s survey of Tier 1 and Tier 2 contractors operating in Greater London, found that building cost inflation rose almost four times higher than contractors predicted in 2021.
Building cost inflation outstripped tender price inflation, representing a challenge for contractors’ margin.
The result is a much higher inflation estimate from contractors for 2022, at 4.2% compared to their prediction of 1% at the beginning of 2021.
According to the study, this will be built in bids going forward, with contractors and their supply chain pricing in the risk of higher costs.
Brian Smith, Head of Cost Management and Commercial, UK and Ireland, AECOM, said: “Despite higher inflation and continued volatility associated with global factors including COVID-19 and Brexit, our survey shows that London’s leading contractors have a positive outlook for the next two years.
“With filling order books and an expected busy market, they have good reason to feel buoyant.
“Contractors in the capital are leaving the unpredictability of the pandemic behind them and are now focused on building longer-term relationships with trusted clients.
“We’ll see a move towards more two-stage hybrid and negotiated tenders this year as contractors look to engage with clients as early as possible to ensure that any risks are quickly identified.
“There is a much more considered approach to pricing, procuring and executing projects and a strive for more collaboration. In 2022, price is no longer the key metric of value.”
Contractors back in the driving seat
Last year the rate of tendering opportunities – the number of tenders invited to versus number of tenders submitted – was 49%. Similar rates have not been seen since 2016.
This is in stark contrast to 2020 when Tier 1 contractors were willing to consider Tier 2 projects as they jostled to secure work.
Contractors won 33% of opportunities in 2021, up from 23% in 2020 as they became more selective.
All contractors surveyed expect an increase in predicted revenue in the next two years. According to the study, order books are almost full for the year ahead and Tier 1 contractors are already at 48% capacity for 2023.
The most cited strategy to secure work in 2022 is developing and nurturing relationships.
Cutting carbon output will be another key focus in 2022, with contractors recognising the need to play their part in decarbonising the sector.
With strong order books, contractors can afford to be selective about the clients they work with and will seek out those with values and sustainability targets that align with their own, finds the study.
While Covid-19 had a strong impact in 2021, the pandemic is no longer a new problem and the associated risks are priced into jobs. In contrast, Brexit is perceived as a bigger risk factor in 2022.
Import and export duty has risen, lead times have jumped due to the delays and paperwork associated with material coming in from Europe, and limited availability of labour is driving up the cost of good labour.
Just under a third of firms said they are experiencing significant effects from Brexit, with 58% reporting minor effects.
If these labour and material issues continue, a higher proportion of contractors will experience continued effects in the year ahead, says AECOM.
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