The skyline in Leeds continues to evolve with the emergence of a wave of high-rise developments a phenomenon that looks likely to continue with city planners currently considering more than 20 buildings that will climb 20 stories or more into the sky.
However, according to Andrew Simpson, Head of Property in Leeds for international consultancy EC Harris, a major imbalance between supply and demand means contractors are being increasingly selective about the schemes that they will contract and deliver which means the days of selecting a number of contractors to competitively tender for large schemes are limited. Instead contractors are now targeting clients, and their schemes, well in advance of them coming to market and this is resulting in reduced competition, particularly for large £50m plus schemes.
This lack of competition means contractors can regularly dictate their own terms and conditions as well as taking a much more conservative approach to acceptance of contractual risk. Ring-fenced figures for overheads and profit of up to 10% are becoming increasingly common and this is up to five times higher than some industry norms.
Risk based contingency sums are also being priced higher. As a result, tender prices from contractors on a design and build basis for large schemes, hitherto a favoured form of procurement because of the cost certainty provided, are rising quickly and threatening the viability of some schemes.
Some clients have initially responded to this by altering their approach to risk, either by entering into management contracts, or adopting a construction management approach. These can attract lower overheads and profit from the contractor, but mean the client is exposed to greater risk. And that needs both effective supply chain management and appropriate risk management!
Financial institutions have traditionally preferred the cost certainty of design and build contracts when funding large schemes but they are now beginning to recognize the need to amend their approach to suit these changing market conditions. Alternative procurement strategies are now being considered, with the institutions paying much more attention to the quality, strength and experience of a client's professional team.
Working closely with the supply chain prior to commencement on site can mitigate much of the increased risk to which a client is exposed, and the financer's risks in these situations can be further reduced through the appropriate use of warranties and step-in rights.
As the number of major contractors capable of undertaking large, high-rise schemes remains low, and as market growth shows few signs of slowing, there is little likelihood of these supply and demand issues improving.
However, this does of course provide opportunities for those second tier contractors who have the appetite to join the construction industry's premier league. This need not be through overexposure to business risk, but could be done as a part of a managed supply chain. In addition, the financial institutions will continue to seek innovations in procurement to protect their interests.
As a result, demand for professional advisors who can demonstrate the ability to make a difference and provide the appropriate experience and quality of resources will continue to increase. However these suppliers are likely to be increasingly selective around their client base as they pick and choose who they work for.
Source: EC Harris