Routine low bidding raises spectre of more high-profile insolvencies in the new year

Half of the UK’s construction firms have been forced to cut bid prices by more than 10% over the past year in an attempt to win work, a major report reveals.

KPMG’s global construction survey, published today, shows 13% of UK firms - more than one in eight - were mainly bidding on a break-even basis. A further 38% said their usual strategy was to cut prices by more than 10%.

The figures highlight the depth of the impact of the recession on construction prices, and will raise fears that low bidding could lead to more high-profile insolvencies in the new year.
Fiona McDermott, KPMG’s global head of building and construction, said: “Globally, around 5% of people are increasing prices, but in the UK everyone’s reducing. The UK is clearly feeling the pain more, and this shows just what a really challenging time it is.

“The expectation is that when the investigation into Connaught’s collapse is complete it will be found they were pricing below break-even levels. I think it is inevitable we will see more similar fall-outs.

“Larger companies can do this for longer as they can spread it among more projects, but smaller firms in particular will suffer. And once you reduce pricing, it’s really hard to go back to original levels without offering something more innovative.”

Many contractors are still reducing the price of bids, the survey suggests: 25% of companies said margins on new projects were more than two percentage points lower than on their backlog of work. The remaining 75% reported no change. No firms reported an increase in margins.

The report comes amid continuing concern over the outlook for the UK industry in 2011 against a backdrop of public spending cuts.

KPMG found that 31% of UK firms expect their backlog to rise over the next year, but this is considerably lower than the global number of companies reporting such optimism (48%).

The Construction Products Association this week warned the sector was heading for a third dip, falling back into decline next year and in 2012, after two earlier falls in output since the recession began in 2007.