Consultants face price cuts of 20-50% as client responds to ‘current economic climate’

Tesco is slashing the fees it pays to its consultants, in response to the downturn in the retail sector.

The company, which procures about £1.4bn of construction work a year in the UK, has written to its consultants, which include Turner & Townsend, Faithful + Gould, Rider Levett Bucknall and Cyril Sweett, threatening loss of work if they do not accept the cuts.

Sources say these amount to between a 20% and 50% fee reduction, depending on the type of work involved.

Tesco is also understood to be in talks with contractors over price cuts. A source at one of its suppliers said: “It’s quite a shock. They obviously need to cut costs, but we can only agree to reductions up to a certain point.”

A letter to cost consultants, sent out in the first week of December and seen by Building, says that the move, which applies to work in the 2009/10 development programme, will apply to all new stores and extensions, although not to distribution centres or the smaller “Express” stores.

It says that cost managers will be paid a monthly retainer in return for carrying out work on a number of projects, whatever the complexity of the schemes. Any consultants unwilling to work on the basis “will effectively be declining future work from Tesco”.

Any consultants unwilling to work on this basis will effectively be declining future work from Tesco

Tesco letter

The letter gave consultants one week to consider its proposals; however, it is understood that several firms are still seeking to negotiate a better deal.

One source said: “It’s a commercial market out there and they’ve got to survive. They’re expecting all their supply chain across the board to take some of the pain. The question is, are the figures up for negotiation?”

The move comes amid deepening turmoil for the retail sector. One consultant said: “The question is whether other retail clients will make similar moves.”

A Tesco spokesperson said: “It is important to remember the current economic climate. Unlike many developers, Tesco will continue its growth and offer continuity for the trade. Contracts are considered on a case-by-case basis and we must take into account that the cost of raw materials has also fallen.”

Tesco’s pipeline of work includes the Gerrards Cross scheme in Buckinghamshire, where a railway tunnel collapsed in 2005.