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Construction News
15/02/2011
Commodity Price Squeeze To Hit Sector As Tender Prices Finally Bottom Out
According to the latest Market View Report from Built Asset Consultancy EC Harris, the construction industry will finally see tender prices stop falling in 2011.
The quarterly report, which tracks tender prices in the UK property and infrastructure sectors predicts that prices will turn the corner in Q2 2011, but opportunities for contractors to increase prices will be limited and tender prices are expected to rise by just 0.2% by the fourth quarter of the year.
London tender prices, on the other hand, are believed to have already bottomed out in Q4 2010 and are forecast to grow by 1.7% to the end of 2011 as a result of a rise in London orders particularly in the commercial office sector.
Whilst construction tender prices are showing upward signs, the report warns that construction clients may experience problems with the delivery of schemes which were won with tenders at excessively low prices at a time when commodity prices are rising.
Record prices are being paid on world markets for copper, energy prices are up 15% and reinforcement and structural steel prices are up by 12% and 10.5% respectively. With a series of recent reports showing an increasing number of construction firm insolvencies, EC Harris' analysis of previous recessions indicates that the risk of contractor/ supplier insolvency is greater on the upturn of the cycle.
Paul Moore, Head of Cost Research at EC Harris commented: "Although we are now expecting tender prices to rise this year, the recovery of the industry is far from certain and could be delayed for a couple of quarters. Contractors' opportunities to increase their tender prices are likely to remain limited and even when workload picks up the worry is the delivery of those low tender priced schemes.
"Where contractors have pressurised their sub-contractors and cut their profit margins to the bone to secure workload, rapid increases in costs could mean that contractors find themselves caught out with limited options to recoup their losses. Previous recessions indicate that the most dangerous time for insolvencies is when workload picks up. That brings with it the pressure of increased costs which can be enough to drive contractors on fixed price contracts into failure."
(CD)
The quarterly report, which tracks tender prices in the UK property and infrastructure sectors predicts that prices will turn the corner in Q2 2011, but opportunities for contractors to increase prices will be limited and tender prices are expected to rise by just 0.2% by the fourth quarter of the year.
London tender prices, on the other hand, are believed to have already bottomed out in Q4 2010 and are forecast to grow by 1.7% to the end of 2011 as a result of a rise in London orders particularly in the commercial office sector.
Whilst construction tender prices are showing upward signs, the report warns that construction clients may experience problems with the delivery of schemes which were won with tenders at excessively low prices at a time when commodity prices are rising.
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Record prices are being paid on world markets for copper, energy prices are up 15% and reinforcement and structural steel prices are up by 12% and 10.5% respectively. With a series of recent reports showing an increasing number of construction firm insolvencies, EC Harris' analysis of previous recessions indicates that the risk of contractor/ supplier insolvency is greater on the upturn of the cycle.
Paul Moore, Head of Cost Research at EC Harris commented: "Although we are now expecting tender prices to rise this year, the recovery of the industry is far from certain and could be delayed for a couple of quarters. Contractors' opportunities to increase their tender prices are likely to remain limited and even when workload picks up the worry is the delivery of those low tender priced schemes.
"Where contractors have pressurised their sub-contractors and cut their profit margins to the bone to secure workload, rapid increases in costs could mean that contractors find themselves caught out with limited options to recoup their losses. Previous recessions indicate that the most dangerous time for insolvencies is when workload picks up. That brings with it the pressure of increased costs which can be enough to drive contractors on fixed price contracts into failure."
(CD)
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