Tender price increase on the horizon as ‘capacity crunch’ hits construction industry
A contractor ‘capacity crunch’ may impact the construction industry’s ability to respond to an upswing in capital spending according to Turner & Townsend, as private sector clients and government reactivate investment plans in the wake of Brexit clarity.
After several years of stalling growth, a return to private sector spending and the proposed five-year, £100bn infrastructure investment due to be announced by the government in the Spring Budget, could lead to a gradual increase in demand.
This changing landscape for the market represents a stark contrast to the lukewarm conditions reported by more than 60% of contractors surveyed in Q3 2019, according to the most recent UK Market Intelligence Report from the global professional services business. Contractor confidence fell to its lowest level on record, and weak client demand and stiff competition for work kept tender price inflation at a mere 2.1% in 2019.
Contractors were also operating at an average capacity of 86.0% in Q3 2019. The significant lack of spare capacity calls into question the construction industry’s ability to cope with an assumed increase in demand.
The report highlights steadily thinning contractor numbers as the key driver behind the looming capacity crisis. This follows a significant number of insolvencies in the past 12 months alongside an exodus of foreign workers from the UK’s construction labour market since the EU referendum.
With fewer firms available to do the work, contractors running at near full capacity will need to buy in extra capacity and recruit more workers quickly, escalating construction wage inflation.
Paul Connolly, UK managing director of cost management at Turner & Townsend, said: “Post-Brexit, the government and private sector investors look ready to loosen the purse strings. An anticipated increase in demand for construction projects and programmes should be a welcome relief rather than a headache for the industry given the recent years of slow growth. Instead, it faces a ‘capacity crunch’ that will impact its ability to deliver on a raft of new programmes and, perhaps more importantly, derail the long-term transformation of the industry.
“Boosting productivity and attracting new talent to the industry are imperative if the industry is to rise to the challenge and meet anticipated demand. Recent commitments to off-site manufacturing and the coming T-Level vocation qualifications are important steps down this road, but there’s no simple fix. To tackle the underlying issues and create the capacity we need, close collaboration with the supply chain is vital.”
Andy Outram, director and real estate leader for Scotland at Turner & Townsend, said: “Within the Scottish market, there is a lot of activity around property investment predicted for the early part of this year in particular. Glasgow and Edinburgh in particular remain attractive as locations for business to operate from, where there is skilled resource with good transport links.
“What is questionable is whether development opportunities will follow form this investment. Major development activity has slowed in all the major Scottish cities over the last few years and if there is a rush of activity, the capacity for contractors to undertake works will certainly be challenged.”