UK market intelligence - looking behind the numbers
How to mitigate risk in an overheated market
The UK economy’s 12th consecutive quarter of economic growth saw GDP rise by 0.4 percent, a slowdown from 0.5 percent for the previous quarter. The main contributor to this reduction in growth rate was a fall in construction quarterly output of 1.9 percent. This is in contrast to the sentiment reported in the November construction market survey which showed increasing confidence – there are clearly mixed messages emerging from the industry.
- 1.9 percent fall in quarterly construction output
- 0.4 percent quarterly rise in GDP
Construction new order data shows an easing in the volume of work accrued, particularly in public housing. As a leading indicator of output performance, this softening in new orders warns of a future reduction in output.
Contractors are also reporting full order books for the remainder of the next financial year to April and a large proportion of work is secured for next year. Against this backdrop of continuing limited capacity, any significant upturn in enquiries could see more projects placed on hold due to inflationary pressures.
The UK market has come back quickly from recession and a very lean and efficient supply chain shaped by the long period of negative growth has not been able to grow in line with market demand. High demand for electricians, plumbers, bricklayers and dry-liners/plasterers are all evident. The volume of bricklayers, plasterers and carpenters active in the industry has fallen by 33%, 24% and 18% respectively since 2008 according to the ONS.
Bottlenecks across all levels of the supply chain, but particularly at site management level and in key trades, are forcing tender prices to rise disproportionately to the level of general inflation. A shift in negotiating influence in favour of the supplier has firmly established a seller’s market.
Mitigating risk in an overheated market
The market is showing significant cost pressures with contractors declaring full order books, often with 18 months or more of forward work. We examine five key responses to counter the impact of price escalation.
Early contractor involvement and collaboration
Inflation and price escalation are key project risks. Engaging with the supply chain to understand how best to manage and control risk is a key response to mitigating its impact. Intelligence sharing through capacity studies, consulting on common approaches to contract risk and timely supplier participation in strategic decisions on project design risk and performance standards are key risk management responses.
Increasing cost pressures can often be mitigated by re-examining the design management process and looking at what design principles can standardised. Key areas to consider are alignment of brand aspirations to the investment case, consistent application of component selection to secure design efficiencies and volume buy, and reducing abortive specifications through component repeatability.
Implementing Building Information Modelling (BIM)
In an era of capacity stretch, the key benefit from BIM is perhaps in optimising how capital and revenue cost is expended. The information model itself, provided it is appropriately federated, provides 100% visibility on the data correlation between the brief and investment case, critical path and scope, specification and totex. Key benefits in countering price escalation are early warning on design non-conformances and component clash detection, pre-planning of design for manufacture opportunities and accurate scheduling of bulk procurement and category management opportunities.
Intelligently packaging scope and risk
In an overheating market, procurement strategy needs to be well thought out - to both reflect the clients appetite for risk and to unlock unnecessary risk pricing. Procurers can mitigate inflation risk by co-ordinating purchasing volumes, unbundling packages to simplify design and work scope, streamlining the number of suppliers to reduce transaction costs and using robust contract management processes to manage tier 1 and tier 2 suppliers.
Asking the question on programme
Programme is a key capital cost driver. The longer the programme, the greater the impact of inflation on capital costs. Challenging pre-conceived assumptions on time related activities will often drive out scheduling and sequencing inefficiencies, create opportunities to incentivise or accelerate programme delivery and potentially cut down on the overall burden of contractor’s preliminaries.