London fit-out report - June 2018
The first half of 2018 has seen continued uncertainty in the market, with further cooling and a decrease in construction output despite forecasts pointing to minor growth in 2018.
An overall hesitancy in client decision making coupled with a lack of willingness to invest, has contributed to a continued decline in pipeline visibility, as reported in our April 2018 update. As competition increases, aggressive bidding tactics have been widely reported. Management churn has also been a key feature of the start of 2018, with contractors looking to reposition themselves and increase market share.
Single stage procurement is becoming more commonplace on larger projects, as is common in a buyers' market.
Trade contractors continue to be stretched and are unwilling to invest in increasing capacity at this time, meaning early engagement of the supply chain becomes increasingly important on single stage tender routes.
In 2018, price growth is expected to decrease by 0.2 percentage points from 2.2 percent, indicating a reduction in the quantity of commercial fit out opportunities and a gradual slowing in the construction market. Skills shortages and rising material costs continue to pose problems for the fit-out market. These also remain the biggest challenges for the wider construction industry while Brexit negotiations continue into 2019 and post Brexit negotiations commence with other trading regions. A reliance on migrant labour to compensate for an ageing workforce is likely to mean an upward trend in labour costs, resulting in inflation forecasts rising into 2019 and 2020.
Tender price inflation
Current Tendering Conditions
Our spring survey showed that there was a 30 percent increase in lukewarm tendering conditions, signifying further increased competition due to the reduction in the quantity of projects being brought to tender. January saw a slower uptake after the Christmas break with the majority of projects being tendered under single stage. This in conjunction with an increase in competition to secure larger projects has driven aggressive bidding, with consistent pressure on tender pricing. Moreover, tier one respondents have commented on a rise in competition as they look to compete on small projects, signifying that contractors are expanding the opportunities they bid for at all levels.
Over the last 12 month period the general market outlook appears to have remained fairly static. Whilst the number of tender
opportunities has decreased overall, there still remains a reasonable pipeline of work as the new office space coming to market
begins to be filled by tenants. This is expected to peak around the end of 2018 and early 2019, explaining the increase in the
quarter of the number of respondents expecting a warmer market in the next six months (31%).
Order books across all surveyed contractors show a slight upward trend of 5 points to close out the financial year on 80 percent. The predicted late surge to fill order books for the last quarter of the financial year failed to materialise, due to the cooling of the market and a reduction in the number of new tendering opportunities. Tier one and two contractors report a combined 19 percent decrease of actual order capacity,
compared with what was originally forecasted at the start of the year.
Despite the cooling of the market, order books closed higher for the same period in 2017.
Order books for 2018/2019 and 2019/2020 remain at similar percentages to our previous survey. Sub-contractor order books continue to remain fuller in comparison, with main contractors throughout both 2018/2019 and 2019/2020. In comparison with 12 months ago, there is a substantial increase in order book fulfilment reported for the next few years. It is evident that contractors and suppliers are seeking to secure turnover in advance of any potential economic downturn, and are not investing in increasing capacity.
Current Tender Trends
Our last survey reported single stage traditional and single stage D&B were the procurement routes of choice.
Our latest survey shows an overall change in dominance to traditional procurement routes for both single and two stage tender strategies, representing 35 percent and 22 percent of the market respectively. Consequently, the D&B single stage procurement route has decreased as a result. This indicates that clients are reluctant to relinquish control of the design, regardless of whether they want an early contractor appointment or not. There are many technology and commercial clients adopting this approach..
In the current market, client business models indicate a preference for short term refurbishment with potential longer term goals focused on relocating after the outcome of the negotiation.
Current procurement issues in commercial fit out
The first half of 2018 has been characterised by a decrease in the pipeline of opportunities with more aggressive bidding from contractors as they look to secure turnover during a period of uncertainty. A number of large projects (over £25m) will come to market towards the end of 2018 and early 2019 however this is likely to place a strain on contractor management teams and the supply chain, with trades unwilling to invest in increasing capacity whilst the current economic uncertainty persists.
Single stage tendering is becoming more commonplace on larger projects as clients seek to take advantage of the perceived buying gains. The market is adapting to this, but there is a nervousness that clients will seek to offload risk, which itself creates risk for contractors during a time of reducing profit margins, but with rising labour and material costs.
The biggest barrier for contractors when fixing a lump sum price is the level of completeness and coordination of the design package. With margins for design practices also coming under pressure, this does create risk for clients when the design may not be complete at the point of going to market.
The pool of suppliers for larger fit out projects in London is small, therefore those clients going to market towards the end of 2018 are likely to have to work harder to make their project more attractive if going down a single stage route. Two-stage procurement will always be more attractive to the market because of the reduced risk, and it presents the opportunity to secure a team earlier. This route can present challenges to the client particularly on fast track programmes, where the pressure to agree a contract price and commence work on site reduces the commercial tension.
Clients will need to carefully consider their key success criteria and engage with the supply chain in order to develop the best strategy.
- High capacity utilisation means ability to secure trades is uncertain.
- Rising labour and material costs combined with lower margins creates risk for clients.
- A lack of confidence from clients means investment decisions are being put on hold. Clients are not committing to relocating and are focused on recycling workspace while uncertainty persists in the market.
The continual cooling of the market provides a level of both opportunity and risk for
clients. Whilst competitive prices can be achieved on single stage tenders, the insolvency
of major household names in early 2018 has created nervousness.
Clients need to tread carefully to make sure they don’t get caught out:
- Ensure that due diligence is applied to the supply chain. References and pre-qualification of trades will help ensure that clients are receiving the right quality of supply chain.
- Early conversations with main contractors and suppliers will provide greater visibility of the pipeline of work and allow effective bid planning.
- Be aware of abnormally low bids and what this may mean for the quality of service provided.
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