London’s construction market is becoming increasingly competitive as firms look to fill their order books in light of challenging market conditions, according to new research from AECOM.
In its annual London Main Contractor Report, which surveyed contractors with a combined turnover of £6bn, the world’s trusted infrastructure consultancy noted an increase in tender activity, suggesting increased competition for work.
The report, which provides a barometer of current market sentiment, compares the number of projects the city’s contractors are invited to tender for versus the number of bids they submit. It finds that the rate stood at 74 per cent in 2023 – five points higher than the previous year.
Tender activity is typically between 60-70 per cent when the market isn’t experiencing major shocks. 2023’s 74 per cent figure is very close to the rate seen in the tough market of 2020 (75 per cent), when COVID-19 lockdowns limited the amount of work available.
The increased competition comes as 20 per cent of tier one – or primary – contractors reported a declining pipeline of new work in light of lingering economic headwinds.
The decline in new starts has been partially driven by London’s residential sector, where projects are evolving to meet new regulation, including the new Building Safety Act.
It is anticipated that lower volumes of activity would disproportionately affect tier two – or secondary – contractors, which operate with smaller reserves and shorter order books, putting them most at risk of insolvency.
However, the report highlights reasons for optimism. Capacity within order books remains positive, with both tier one contractors (11.5 per cent capacity to fill) and tier two contractors (13 per cent) having less capacity than at the same time in 2023. But contractors remain aware that tightness in capacity could soon return, according to AECOM.Looking further ahead, at least half of tier one firms expect turnover to rise by 10 per cent over the next three years, while 70 per cent of tier twos said revenues will rise between five and 40 per cent.
Volatility in material and labour costs is seen as the biggest challenge for firms this year, alongside labour availability, trade contractor insolvency, market competition and building regulations.
London firms are scenario-planning for inflation to run at an average of 3.4 per cent in 2024, continuing to fall from 2023 but still higher than the 2.3 per cent forecast by AECOM.
Brian Smith, head of cost management and commercial AECOM, said, “There is a sense among London-based contractors that 2024 is not a year for ambitious growth.
“Instead, it’s a year to re-enforce resiliency and dependability, as the number of new projects coming online falls and competition begins to increase. However, their order books for 2024 are relatively healthy and so their focus has turned to opportunities that will be on site in 2025.
“Last year brought a change in the tendering environment, with firms being more open and seeking opportunities to tender for work, and that’s going to become more entrenched this year, with fewer opportunities available. Two-stage contracting, where contractors are engaged earlier in the design phase before being appointed to deliver the project, is now by far the most popular procurement method. That’s because both clients and contractors see the value of having conversations about design, feasibility and price before anything is locked in – this is crucial when inflation and interest rates are in flux.
“Alongside developing closer relationships, guided by expert advisors, market growth will also be on the cards for the contractors that are able to quantify and price decarbonisation into their bids, while also delivering against social value ambitions.
“This will be key to navigating the economic headwinds in 2024 and helping stave off insolvency.”
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