Lead times
Although the time taken to procure air-conditioning installations has fallen to three weeks, manufacturing time has increased to six, giving a net increase of three to 13 weeks.
Ductwork package lead times have also risen one week to 12. Contractors have been restricting orders in an effort to maintain lead times, but surplus orders are being picked up by smaller firms, causing a slight increase. Lead times are not expected to rise further this year.
The lead time for variable-air-volume boxes remains constant at 10 weeks, with workload and demand unchanged. This is expected to continue in the coming year.
Mechanical pipework lead times have reduced from nine weeks to seven since the last report, a result of more efficient design efforts and a slight dip in workload.
Overall, lead times for mechanical installations are under pressure to increase, but the levelling-off of order growth expected later this year should see lead times constant in the short term and reducing slightly in the early part of 2000.
Enquiries
Although enquiries have not yet recovered to the levels of the late 1980s, they are about double their levels at the depths of recession.
Mechanical contractors report that there are plenty of enquiries, with no shortage of tenders available. However, the quality of enquiries comes in for some criticism, with the majority of mechanical contractors favouring partnered, negotiated or named-contractor tenders. John Cullen, national sales director of Mitie Engineering, says that 25-40% of enquiries the company receives are negotiated or partnered.
The healthy level of enquiries is not threatening to cause overheating in the industry. Although contractors report that order books for 1999 are looking promising, additional workload is still required for next year. One major mechanical contractor suggests that "although we haven't seen any slowdown on enquiries, we are hearing from consulting engineers that things are beginning to slow up".
The continuation of lottery-funded projects is likely, but there is concern among mechanical contractors that enquiries for millennium projects are coming to an end. On the contracting side, enquiries look set to remain buoyant through 1999, perhaps easing off next year.
The present workload does not seem to be concentrated through any single sector, with contractors reporting a good level of enquiries through leisure, retail, commercial and even residential sectors. There are still enquiries in industrial markets, although some report a slight downturn in manufacturing. Despite the reduction in the planned number of out-of-town shopping centres, there seems to be continued growth in in-town developments.
Orders and workload
Despite warnings of a slowdown in the market, with some construction output forecasts suggesting that growth in the general industry will be about 0.5% this year, mechanical contractors report healthy order books. Some have reduced their targets for this year, and others are reporting that they are actively recruiting. Peter Wright, estimating director at Lorne Stewart, reports that "we are presently aiming to recruit additional engineers and project managers".
Contractors report a shortage of good-quality engineers, but are less concerned with availability of site labour, as most companies operate apprenticeship schemes. There does, however, seem to be a shortage of class one welders in the London area at present.
Some of the workforce lost during the 1990s recession has returned to the industry, forming labour-only companies. This has served to satisfy the transitory demand for labour, particularly on fast-track starts, where contractors cannot free up their direct workforce from existing commitments. It has also assisted on large-scale projects.
In order to remain competitive, contractors are looking to increase efficiencies and productivity by prefabrication and, where possible, by victolic jointing. Prefabrication in a factory environment not only reduces time on site and the quantity of labour required, but is also helping to increase quality and reduce defects. Further efficiencies are being achieved by rationalising and standardising support components.
Some contractors are aiming to increase their market share by diversifying into specialist areas. Mitie Engineering is aiming at niche markets through the creation of specialist subdivisions. And, in addition to the new-build retail sector, much demand is created in the mechanical sector by refurbishments and refits.
The residential and hotel sector is proving to be a buoyant market this year. From the contractors' viewpoint, the City of London has always provided good levels of work. The commercial sector in London is currently busy with HQs for US companies and law firms.
There may be some concern about a medium-term slowdown in enquiry levels, but the number of projects that have already been committed to means that some contractors have order books stretching into 2000. Estimates suggest a possible increase in workload of about 5% for each of the next two years. Beyond that, it is pure speculation, but many expect an easing off of growth thereafter.
Tender prices
Narrow margins and a tight tendering climate seem to be the order of the day for mechanical contractors, although the healthy level of enquiries mentioned above has enabled contractors to be more selective about tenders. Reports from contractors suggest that margins may be tighter in the North than in the South-east. Some main contractors come in for criticism from the mechanical specialists for Dutch auctioning, inadequate tendering periods and long tender lists. One project mentioned by a number of mechanical contractors had 12 firms bidding for one domestic tender package.
Peter Wright, estimating manager of Lorne Stewart, advised that "enquiries with unrestricted tender lists will be rejected". Referring to the new construction code of practice for the selection of subcontractors, he added: "There are published guidelines on tender numbers for certain values of projects, if only the industry would follow them." Many mechanical contractors share the view that more realistic tender prices are achievable by bidding directly to the professional team. They agree that it may be possible to tender at a lower price, but not without compromising quality.
Mechanical contractors call for an earlier involvement in the design process, either by partnering or by two-stage tendering. This would allow them to undertake value-engineering exercises before the final design is produced. They consider the ability to offer the contractor's overview will be in the client's best interests in increasing quality.
Tender prices for mechanical installations increased by no more than 4% in 1998. They are now forecast to increase 1.5-2% both this year and next. One contractor advised that material prices have, over the past year, crept up 5-6%, and they were facing labour cost increases of 3-6%, although the strength of sterling has kept the cost down for items of plant manufactured overseas. Few contractors expect to see their margins increase greatly; most expect the rises to do no more than offset increases in costs.
