Specialists face more than falling tender prices in uncertain future
Pressure on tender prices is not the only challenge that the specialist sector is going to experience in the post-lockdown environment as both workload and productivity will continue to decline. These are some of the key findings from Mace in its UK Market View Q2 2020 report that was published last week and highlighted an uncertain future for construction.
The Mace report forecasts that, at best, tender prices will remain static for 2020 but fall 2.5% in 2021 due to the combined impact of business re-sizing to reflect demand and an increased appetite in the supply chain to secure work. However, Mace say that the immediate priorities are maintaining cashflow and ensuring business resilience and then, in the longer term, the need to win work in 2021.
Until social distancing stops being a requirement at best, MACE expect output to be 20% lower than pre-Covid levels. This will create a cash-flow time-bomb as project programmes inevitably extend and weaken the ability to generate revenue.
As GDP falls there is also likely that construction will share in the pain as residential and commercial sectors appear vulnerable and therefore a substantial drop in new projects over the next 18 months is expected.
Housebuilding has been the engine room for construction output, last year it accounted for 40% of all new work. Higher unemployment and lower disposable income could deter house builders from going ahead with schemes and remove a significant source of work.
The speed of the pandemic has inevitably damaged the supply chain. Contractor balance sheets have been weakened and resources have shrunk; large numbers of non-UK labour returned home during the lockdown. Firms are likely to respond in different way so MACE anticipate that firms in the supply chain will respond in very different ways with tender price spreads expected to increase.
Factors influencing tender prices will be led by demand and how and when it bounces back. A prolonged contraction will increase downward pressure. However, a quicker return could see pressure increase if supply chain capacity struggles to respond to abrupt swings in demand, especially given the industry re-sizing that is currently underway.
Ultimately tender pricing will be dependent on the supply chains appetite to accept risk. If procurement strategies seek to transfer risk down the supply chain then contractors may be deterred from tendering. Alternatively a pragmatic approach to project riskmanagement may ease pressure on initial tender pricing.
Mace also warns that there are two major downside macroeconomic risks; a second wave infection and an issue with Brexit.
