Competition gest tighter in the capital

Aecom’s annual London Main Contractor Report, which surveyed 50 tier one and two contractors, notes an increase in tender activity, suggesting increased competition for work. The report, which seeks to provide a barometer of market sentiment, compares the number of projects for which the city’s contractors are invited to tender versus the number of bids they submit. It finds that the rate stood at 74% in 2023, compared to 69% in 2022.

Construction consultant Aecom says that tender activity is typically between 60% and 70% in ‘normal’ times. Last year’s 74% figure is very close to the rate seen in the 75% seen in 2020 when the covid pandemic impacted workloads.

The increased competition comes as 20% of tier one contractors reported a declining pipeline of new work, partially due to residential starts on hold, pending compliance with new building regulations.

However, the report highlights reasons for optimism. Capacity within order books remains positive, with both tier one contractors (11.5% capacity to fill) and tier two contractors (13%) having less capacity than at the same time in 2023. But contractors remain aware that tightness in capacity could soon return, according to Aecom.

Looking further ahead, at least half of tier one firms expect turnover to rise by 10% over the next three years, while 70% of tier twos said revenues would rise between 5% and 40%.

Volatility in material and labour costs is seen as the biggest challenge for firms this year, alongside labour availability, trade contractor insolvency, market competition and building regulations. London firms are scenario-planning for inflation to run at an average of 3.4% in 2024, continuing to fall from 2023 but still higher than the 2.3% forecast by Aecom.

Brian Smith, head of cost management and commercial Aecom, said: “There is a sense among London-based contractors that 2024 is not a year for ambitious growth. Instead, it’s a year to re-enforce resiliency and dependability, as the number of new projects coming online falls and competition begins to increase. However, their order books for 2024 are relatively healthy and so their focus has turned to opportunities that will be on site in 2025.

“Last year brought a change in the tendering environment, with firms being more open and seeking opportunities to tender for work, and that’s going to become more entrenched this year, with fewer opportunities available. Two-stage contracting, where contractors are engaged earlier in the design phase before being appointed to deliver the project, is now by far the most popular procurement method. That’s because both clients and contractors see the value of having conversations about design, feasibility and price before anything is locked in – this is crucial when inflation and interest rates are in flux.

“Alongside developing closer relationships, guided by expert advisors, market growth will also be on the cards for the contractors that are able to quantify and price decarbonisation into their bids, while also delivering against social value ambitions. This will be key to navigating the economic headwinds in 2024 and helping stave off insolvency.”

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