UK construction clients should look beyond a transactional approach and focus on collaborating with suppliers as the market heads into what may be a prolonged period of deflation, according to Turner & Townsend.
The company’s latest UK Market Intelligence Report highlights the prospect of volatility and variability in pricing, which follows unprecedented uncertainty resulting from the Covid-19 crisis and the competing forces affecting pricing decisions across different regions and industry subsectors.
The report warns that clients need to be wary of low or even suicidal tendering in the current deflationary climate. Unsustainable pricing will result in the further erosion of contractor margins, creating the conditions for a wave of insolvencies that would badly reduce industry capacity and capability in the future.
Turner & Townsend is anticipating tender price deflation across 2020, with tender prices for real estate projects expected to reverse 1.0% this year owing to waning private sector investor confidence. Demand in health and social care, life sciences and data centres suggests more optimism in certain sub-sectors though.
In contrast, infrastructure projects are forecast a brighter outlook, with inflation expected at 1.0% across 2020 on the back of resilient demand, visibility of pipelines and government spending acting as a short-term stimulus.
However, Turner & Townsend warns that these inflation positives will not be sufficient to offset price softening across construction as a whole.
Amid the current turbulence, Turner & Townsend is advising clients to focus on securing best value, stability and certainty throughout the project lifecycle. Procurement teams should consider bringing projects to market quickly to improve the visibility of the industry pipeline – boosting contractor and supplier confidence, supporting more sustainable margins and improving overall market resilience.
The latest UK report recommends the steps that clients can adopt to boost productivity and support the emergence of a more sustainable, innovative and highly skilled industry as a part of a healthy recovery.
Paul Connolly, UK managing director of cost management at Turner & Townsend said: “The Covid-19 crisis has already blown countless projects off course, but the next headwind the construction industry will have to contend with is deflation.
“Despite the outward attractiveness of falling tender prices, a prolonged deflationary period brings significant hidden dangers to the industry as a whole. Transactional supplier dynamics and compromised margins will only damage an already vulnerable supply chain – insolvencies risk disrupting project delivery, eroding industry capacity and ultimately driving prices higher for all in the longer-term.
“How clients respond to this deflationary climate is now critical – their behaviour can either fan the flames or head off a serious crisis. Clients will find there is more to gain in the long-term by collaborating more closely with suppliers to ensure a healthy recovery than perhaps securing a fleeting tactical win. They must look beyond the transactional to ensure best value and stability, for both their programmes and the construction sector more widely.”