Balance of power shifts as contractors step away from bids

The construction industry has and will continue to grapple with low margins, often challenged by prolongation of fixed-cost contracts and uncertainty in the supply chain. With termination and damages clauses written into contracts, many businesses are unable to put the brakes on them. 

As margins erode and losses set in, a firm’s means of survival is often to mitigate additional damages by renegotiating extensions of time and to monitor the solvency and delivery from the extensive supply chain below. 

As contractors see the closing of multiple legacy contracts bid before and during the pandemic, they are looking ahead at the pipeline to preserve margins. There is a different feel this time to the bid and procurement environment in the industry, with a large number of businesses scaling down their operations either through a reduction of contracts or an exit from large-scale, complex agreements knowing they can protect margins through the careful selection of projects.

Those bidding now are much more willing to step away from an opportunity

There is what appears to be a shift of power, in that those bidding now are much more willing to step away from an opportunity, challenging collaboration, procurement policies and the margin delivery of the project.

A number of firms used the pandemic to tighten up their operations, access data and analysis on contract performance, and to focus on what they deliver best, as well as how they create further efficiencies. This, coupled with better technology in the design stage, has allowed many of these firms to gain clarity on what they want to tender for – and what they may choose to simply step away from.

As numerous procurement processes have failed to evolve within the timeframe, particularly in public procurement, some projects no longer look viable for delivery at a safe margin. The use of technology to better design and manage projects also supports collaboration through the supply chain, shifting the onus from the main contractor as the one taking all the risk.

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Therefore, a contractor willing to bid may not be in position to procure the supply chain beneath it and determine the pricing.

Many businesses sit with a strong pipeline of works as both public and private projects see an increase in activity. This shifts the demand dial in favour of the contractors, allowing them to be more selective.

This tension will continue to grow as the government increases spending on transport, energy, healthcare and education alongside its drive to increase the volume of houses built. We may see further changes in behaviour as updates to the public procurement act come into force this year.

While mobilisation of contracts remains a challenge, the pipelines are full. So a slippage becomes lest impactful and, with an increase in both live and predicted insolvencies, the main contractors consider the availability of labour across overlapping and multiple projects.

Construction businesses have much more understanding and insight into how to create stable growth

The industry is astutely aware that the supply chain is fragile, with a number of smaller supply chain members facing working capital challenges and a restricted access to funding. This led to construction seeing the highest number of sector insolvencies in the final quarter of last year.

It certainly feels like the industry has tighter reins on growth opportunities and, as it recovers post-pandemic, construction businesses have much more understanding and insight into how to create stable growth. This is one side of the story; the other side is the pool of businesses fighting for survival having been hit by multiple loss-making contracts and the erosion of working capital with little access to further funding.

Sadly, we will see more insolvencies and further disruption to projects as these sub-contractors go under.

In the short term, the level of labour in the industry will remain, just redeployed by other buoyant companies. However, we will soon see a reduction in the availability of labour.

So, with a growing pipeline, stimulated economy and a better educated contractor, some clients may find themselves with projects and frameworks that go undelivered.

Kelly Boorman is national head of construction and a partner at RSM UK