Recovery expected to take longer than initially thought, as Arcadis downgrades tender price forecast for 2020 to 4% deflation in London and 3% drop regionally • Size of potential pipeline and contraction of UK labour force could prompt price rises from 2022, with 5% inflation forecast across many sectors by 2023 • Combination of urgent short and long-term actions will be essential for securing a lasting rebound and recovery
Although the UK has moved into phase 2 of post-COVID-19 recovery, the risk of disruption remains, with delayed project starts and completions, and increased fixed costs threatening to sap the strength of the industry, Arcadis has warned. As a result, Arcadis has downgraded its tender price forecast for the year 2020 to -4% in London and -3% in the regions, with the risk of further deflation into 2021.
The analysis comes courtesy of Arcadis’ latest Summer Market View; ‘Great Expectations…?’, in which Arcadis asks whether the recovery measures announced so far will be sufficient to support the industry long term. This quarterly analysis of the UK construction market looks across sectors and regions and delivers a tender price forecast to facilitate financial decision making for projects and programmes.
Now that most construction sites are operational, productivity has recovered better than expected, ranging from between 70-90% depending on the sector and the stage of the project. This has contributed to the lowering of prices, edging the balance of the industry closer towards deflation and offsetting some of the initial inflationary pressures from extended programmes and different ways of working.
The industry is at a turning point. Prices have been rising since 2014, but profitability across the sector has barely recovered. With further disruption associated with Brexit and changes to labour markets ahead, Arcadis expects that contractors and their supply chain will continue to take a risk averse approach to business development – focused on quality work rather than work at any cost. However, this presents an opportunity for clients who are ready and able to work with their project teams to bring forward de-risked and deliverable projects.
While the mid-term outlook is pessimistic, Arcadis retains a bullish view longer term. Tender price inflation has been forecast at 5% for 2024/25, reflecting not only the size of the potential pipeline, but also the long-term contraction of the UK labour force. Despite this, the path to recovery will not be straightforward, and new projects will be exposed to an increased level of risk, not just from potential new waves of infection but also new risks associated with health and safety, productivity, viability, and supply chain stability.
This increased sensitivity to risk among both clients and contractors is likely to be seen in higher hurdle rates on investment returns, more demanding contract terms and greater project selectivity. These factors will determine how many projects will proceed, and how quickly they will start. This in turn will influence the shape of recovery and future market conditions.
As Simon Rawlinson, Head of Strategic Research at Arcadis, said:
“Clients are reconsidering their business needs, with risks around lower productivity, future COVID-19 disruption to works, and supply chain resilience all having the potential to cause delays and increases in costs. We need a different approach, not just to make sure that projects succeed, but also to ensure the long-term health of the sector.
“Looking at the wider industry, a successful rebound will depend on urgent, short-term actions - such as longer site operating hours, extended planning consents and prompt payments – combined with strategic longer-term thinking. Small steps will enable gradual progress towards ‘bigger’ tasks such as rebooting apprenticeships, embedding digital technologies, or exploring more collaborative business models and contractual terms. We have a real opportunity here to strengthen the collaborative spirit of the industry as well as enhance procurement. This will have the benefit of increasing transparency as well as embedding some pragmatic thinking into contracts to increase overall project resiliency.”
