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Contractors turning down one in three invitations to tender says AECOM survey

London’s biggest building contractors are turning down one in three bidding opportunities as an increased workload and growing skills shortages see the balance of power shifting in the construction sector.

AECOM’s 2014 London Contractors Survey, polling main contractors with a combined UK turnover of almost £7bn, shows that contractors are becoming more selective by turning down work from projects and clients they perceive to carry higher risk.

Contractors including Laing O’Rourke, Mace, Kier, Brookfield Multiplex, Skanska and Willmott Dixon, as a well as a large selection of specialist subcontractors took part in the poll, which was held at a time when many new clients are looking to place work.

“Stable relationships between clients and contractors are becoming ever more important. Procurement route, work type and the location of work are also increasingly being given as reasons to tender or not to tender, with many contractors now only willing to accept work on a negotiated basis" - Brian Smith, AECOM

AECOM is also forecasting that 2014 will end having seen 5-6% tender price inflation in the London market, and is predicting inflation of 5.1% in 2015 and 5.3% in 2016. This contrasts with previous years where price levels were falling.

Labour shortages are now the primary driver for price rises, with specialists in concrete and brickwork continuing to be in demand, and growing demand for joinery and dry lining. AECOM is predicting that electrical engineers will be the next specialists to see strong pick-up in demand.

AECOM director Brian Smith said: “Clients are seeing sustained and increased tender prices - what we forecast a year ago has become a reality. Contractors are now becoming far more selective, assessing project attractiveness and risks.

“Stable relationships between clients and contractors are becoming ever more important. Procurement route, work type and the location of work are also increasingly being given as reasons to tender or not to tender, with many contractors now only willing to accept work on a negotiated basis.

“However, it is important to remember that overall price levels are still lower than they were in 2008, and even at the rates of inflation we forecast they will not get back to their previous peak until 2017.”

The other driver for price rises is increasing contractor margins. Clients who have engaged in an adversarial relationship with contractors are finding the boot on the other foot, with contractors able to turn down work in favour of clients who have worked on a more collaborative basis.

Refurbishments or work on complex projects which entail substantial risk for contractors are also becoming increasingly difficult to invite contractors to bid for.

The AECOM survey also found that London contractors have on average already secured 71% of their turnover for 2015, which is higher than the 67% secured for 2014 at the same time last year.

However, there are early signs that after 18 months of strong activity the market may be adjusting to a lower rate of annual growth, with contractors having only secured 26% of their work for 2016 and 9% for 2017 – with the two year pipeline figure being lower than in 2013’s poll but the three year figure marginally higher.

In the long term, according to research by AECOM analysing the housing shortfall for 127 local authorities within 90 kilometres of central London, the capital and the wider south east must find space for more than 1 million homes on top of what is already planned.

 The full list of contractors taking part in the AECOM 2014 London Contractors Survey is Ardmore, Bam, Brookfield Multiplex, Galliford Try, Kier, Laing O’Rourke, Mace, Midgard, Skanska, Walter Lilly, Wates Construction and Willmott Dixon. An additional 16 specialist subcontractors also completed the survey.

If you would like to contact Jackie Whitelaw about this, or any other story, please email jackie.whitelaw@infrastructure-intelligence.com.