Construction costs are rising. From their lowest around mid-2010, we saw increases of around 10-13 per cent to the end of 2014.
This growth is expected to continue this year, at around 3 per cent in the North West, with similar forecasts until the end of 2019. So what does this mean for the industry?
The prime driver is the lack of supply in the market. Skilled labour has always been the industry’s biggest constraint with wage growth in construction outstripping the general market.
While construction input cost growth has moderated after two years of very strong growth, that moderation is not reflected in the growth of tender prices. Contractors are increasing their margins.
We are seeing less returned tenders and more refusals, with an unwillingness to tender in the first place unless there is a 50:50 chance of the project going ahead. With a more restricted pool and a price that is not market tested to the degree that was possible in previous years, how do they know they are getting the best value?
Insolvency is also continuing at all levels of the market, which means added risk for a project and ultimately less contractors in the market, creating a supply chain risk for the contractor.
Developers will look at three factors during a project – time, cost and quality. It’s difficult to focus on cost when costs growth is just a fact of life, and no developer would want to compromise on quality, so what’s left is time.
If costs are rising, the quicker a project starts the better. So how do you fast track your procurement?
It’s often sensible to carry out early works with smaller contractors or friends ahead of finalising requirements and getting the main contract to site.
Alternatively, some may choose to go two stage and task a main contractor with carrying out early works while helping to finalise requirements – getting the contractor and supply chain involved early.
Lastly, utilising a good construction manager (CM) is also coming back into favour – the CM will only receive his fee so has no interest in growing the project.
