Smaller construction firms suffering most, says report

Aug 6 2008 by Tony McDonough, Liverpool Daily Post

MANY large construction firms continue to enjoy healthy order books, despite the credit crunch, but smaller companies further down the chain are suffering.

That’s the conclusion of a new report by construction consultancy Davis Langdon, whose Liverpool office is a key player in the £1bn Liverpool One retail development and the Echo Arena and BT Convention Centre.

In its latest market forecast it has found increasing evidence of a two or even three-tier market with small and medium-sized construction firms feeling the crunch with declining workloads whilst large contractors continue to have full order books. Larger contractors benefit from less competition for the bigger projects and the longer timeframes involved mean that work will carry them through into 2009.

There is little evidence, according to the report, of increased competition or sharper pricing at the top end of the market and buying some trades on budget remains a problem at present.

In addition, larger projects have generally been more exposed to rising commodity costs and exchange-rate-driven inflation over the last year and, as a result, suffered higher inflation levels. In contrast, there is increasing competition on the smaller projects forcing contractors to lower their overheads and profit provision and to accept more varied procurement types, such as single-stage tendering.

With a continuing industry decline and more smaller and medium sized contractors looking for work, cut-throat market conditions could soon ensue.

Over the coming year, contractors of all sizes will be hungrier for more work, but are also likely to face higher wages and increased material costs.

Peter Fordham, the author of the report, said: “If the slowdown in western economies helps to cool commodity prices and labour rates drop in a chase for work, we could see construction prices coming down.”

Inflation over the next two years should reduce for most construction work. London prices are expected to rise by 3 to 5%pa.

Outside of London, falling demand and increased competition for work will lead to lower price rises and inflation as low as 2-3%, or possibly even a negative figure some time over the next 24 months.

The report forecasts that tender prices for the North West will increase by 4% and by 3.5% in the Yorkshire and Humberside region over the coming year.

tonymcdonough