With the summer of recovery looking in increasing danger of being over before it has really begun
The onset of autumn, marked with the clock change last weekend, appears to have been mirrored in a darkening of mood over the outlook for the industry over recent weeks - with the summer of recovery looking in increasing danger of being over before it has really begun.
The Office for National Statistics’ preliminary estimate of a 2.2% fall in output for the third quarter, released on Tuesday, will be the first quarter-on-quarter fall in output for two and a half years if it is confirmed once the final data has been collected. Coming after months of worsening economic indicators, including new order falls, the drop is not unexpected. But this stark proof that the faltering market many in the industry have been experiencing is equating to a sustained drop in overall output raises the serious question over whether we are witnessing the start of the end of the industry’s recovery.
As we explore on this week’s news analysis here, there is cause for concern across many of the major sectors of the industry’s work. Repairs and maintenance has, in the words of one analyst, “fallen off a cliff”, but there are also drops in orders in office work, retail and social housing. Even private housing, the driver of recovery so far, has levelled out, as shortages of skilled labour and rising land costs have hindered the viability of sites.
But even when all this is taken into account, this is not to say that the outlook offers no cause for optimism. Infrastructure - notwithstanding the well-publicised delays to several major schemes - is a growing market according to most estimates, driven by rises in transport and regulated utilities work. And although the Construction Products Association is preparing to downgrade its forecasts for 2015 and 2016, it will still be predicting growth - in line with the view of many in the market who say they have strong order books for the next 12 months.
However, what is worrying many in the sector is that the market - which is still languishing well below its pre-recession peak - does not look robust enough to withstand a shock. And given macroeconomic fears about the slowing global economy, in China in particular, and the potential impact on confidence of the forthcoming in-out EU referendum, such a jolt is a very real possibility.
This situation is worrying across the entire sector but particularly for contractors - many of which have still barely felt the impact of the recovery on their margins. While their position in the supply chain means they will be hit later than consultants and architects by any sustained drop in demand, the prospect of recovery levelling off sooner - and at a lower level - than anticipated will inevitably lead to hesitance over increasing capacity to meet current demand. And this, in turn, could fan the flames of the cost rises that are putting developers off bringing sites to market - making the reasons for delaying projects stronger still.
At an individual business level, there are various approaches contractors are taking to insulate themselves against the impact of this current market volatility, including buying up supply chain capacity to give them greater control on costs. One approach which is of potential concern, however, is a return to single stage tendering.
As Aecom’s Michael Hubbard’s article here identifies, after a period of favouring two-stage deals which have now led to some contracts being put on hold at the second stage due to spiralling costs, some contractors are choosing to pursue opportunities to secure entire contracts immediately to boost cashflow.
While this will protect them against schemes being put on hold, it means a lot is riding on the terms of a deal struck at a point in the market when no one seems able to forecast costs with particular confidence.
With costs still rising, the single-stage approach is a significant gamble, and one which may well be storing up more problems than it solves.
It would be a depressing irony if the market blip did turn out to be just that, but that contractors found themselves once again battling a legacy of work taken on at unsustainable margins. Particularly given all the financial hits and legal wrangling over final accounts that almost inevitably follow.
Sarah Richardson, editor