Taking the pressure out of construction

The London investment market is becoming saturated and clients are increasingly focusing their activity further afield with investment spreading to regional hubs making the recovery a nationwide reality.

With markets now in full swing, clients with money to invest are spending speculatively, particularly on office refurbishment and retail development. High levels of investment in commercial property, both from national developers and overseas investors, are resulting in increased asset management initiatives across the country. Occupier demand is such that clients are increasingly fast-tracking contract work.

The effect of this recovery is that the construction supply chain is coming under pressure as the construction market has yet to recover from the depletion that occurred during the recession.

Crucially, construction demand is higher than contractor supply and clients wishing to take full advantage of the market recovery need to understand and manage these challenges. There are a number of techniques that can make the difference.

Coping with the pressure

So, with the construction market under such pressure, clients need to plan thoroughly and well in advance in order to manage risk and deliver promptly.

Market intelligence suggests construction inflation of 6%-7% a year until 2016 or 2017 when inflation will begin to level out as more suppliers enter the market. Clients need to prepare budgets and appraisals based on such projections.

Expect business relationships to take some strain. Contracts that are subject to a fixed price now may come under pressure, which could lead to disputes, claims or risks to clients. The value of strong relationships with the supply chain should not be underestimated. Bulk buying and repeat instructions can be techniques to maintain relationships.

Subcontractor labour shortages are driving up costs and having an impact on consistency. Contractors can no longer rely on their established supply chains due to competition from others, which is affecting price, quality and control.

There is now ever-higher demand for certain materials and components, which is increasing costs and lead-in periods. Brickwork, steelwork, glazed components and HVAC equipment are all notable examples. Similarly, utility providers are under pressure following an increase in orders that has not been balanced by increased resources. The lead in time for quotations and connections are key risks to a programme and very early engagement is required.

Delivery programmes should realistically forecast ‘power on’ dates and contingency planning should be put in place in the event of delays. Where practical, preletting agreements should be flexible to allow handover without reliance on permanent supplies.

Procurement

The adopted method of procurement needs to align with the client’s objectives and advisers should not be afraid to offer one-off solutions where these are required to meet specific project needs and manage the unusual market conditions.

Clients need to get their products to market faster, which means increasingly aggressive programmes so as to beat the competition. In this market procurement must be quick, controlled and bespoke. However, by planning in advance and considering all options, procurement can still be smooth.

Larger contractors are being increasingly selective about the type of project and the method of procurement route they will consider. This is due to contractors having full order books and limited resource available to deal with tenders. Many contractors will only consider two-stage and negotiated procurement routes and those projects they see as attractive and profitable.

Medium to small contractors will engage in competitive tendering as simpler schemes require less contractor resource for pricing and there is greater competition.

Fast-track or complex projects lend themselves to two-stage or negotiated procurement design and build routes with sophisticated contractors managing the preconstruction and design process. Clients should take advantage of established relationships and known track records to reduce the risk of being taken advantage of in a non-competitive environment.

Fully open book arrangements can be adopted to drive value, while strong quantity surveyors are an integral part of the process.

The current uncertainty around the supply chain means contractors may have less influence on their subcontractors who are typically responsible for specialist packages that carry the most risk. The selection of a main contractor should therefore be based on the track record, strength, reliability and quality of their proposed subcontractors.

Time can be saved and material, utility and labour issues managed by identifying risks early and procuring enabling packages that can be progressed in parallel with design development. The use of preconstruction agreements can provide speed with contractual control and involve a lead-in period to begin design.

The design-and-build route is now as popular as ever as demand for property is high and construction can, in theory, be more quickly realised. Clients do, however, need to acknowledge the impact the market is having on their ability to negotiate contract terms and achieve satisfactory risk transfer. Clients and their advisers should not underestimate the time needed to negotiate satisfactory terms with contractors and consultants; programmes should realistically reflect the level of discussion that is now necessary.

The use of framework arrangements, formal or informal, with known contractors and consultants can aid this process where terms and conditions have previously been agreed and relationships exist. The market is evolving, however, and what works on one project may not be acceptable on
the next.

Contractors are increasingly interested in the strength of the design team in the design-and-build world. Clients should appoint appropriately experienced teams to demonstrate credibility and make their project attractive to the market.

The right choice of contractor

While the contracting market is smaller, good quality and high reliability still exists; it is just a case of finding it. Existing relationships and senior-level contacts in organisations should be used where possible with ‘bigger picture’ discussions held early.

Higher-value, more complex projects will require the services of established contractors who have retained or obtained the specialism and experience required. Smaller or medium-sized contractors entering this market have yet to reinforce their teams to be competitive from an experience or track record perspective so this can be a risk to delivery.

There is now a mixed group of high-value main contractors coming out of the recession - some are in great shape, some not so good with large-scale restructuring programmes in place. Consolidation is still taking place and a review of such initiatives is important in understanding the implications.

The medium-to-low value end of the market is more competitive as projects are less complex and easier to access due to less need for specialist input. The influx of contractors into this market means that health and safety needs to be very carefully assessed, regardless of the value of job. Labour from the EU presents challenges in terms of language and approach and contractors should demonstrate how controls are used and monitored. Increased resource needs to be tempered with increased training and this should be challenged during selection.

Location counts

While the type of project is crucial to making the decision about which contractor to employ, geography also has a part to play.

London has a highly competitive market. As such, two-stage or negotiated procurement with known contractors is favoured in order to maintain control and to reduce risk. Framework arrangements with contractors can be beneficial from a quality, programme and cost (economy-of-scale) perspective.

Nationwide hot spots require a combination of two stage or negotiated procurement, but there is a greater opportunity for single-stage tendering for lower value works. The market is less competitive, which opens up a wider range of opportunities.

Indications are that over the next two to three years, contractor supply will rise to meet client demand and greater competition will return. Until then, clients can still achieve their objectives through recognition of the current conditions and tailoring their procurement strategy to suit.

Richard Taylor is partner at Workman