Mace Cost Consultancy has published its Tender Cost Update for the UK for Q2 2016, one month after the EU Referendum result in favour of the UK leaving the EU, carrying out a full review of the potential effects on construction workloads and tender prices.
Although it is still early days in terms of assessing the impact of the referendum result, we have taken the view that there is likely to be a modest slowdown in the demand for construction in the medium term. This slowdown is expected to reverse the current upward trend in tender prices and our forecasts have been revised downwards to show a small fall in the medium term.
We therefore expect prices nationally to have increased by just 2% in 2016, but a softening in demand in the regions will result in a 1% reduction during 2017 followed by flat prices in 2018 as a degree of economic stability returns. In London, we expect the ongoing pipeline of work to lead to stable prices in 2017 with the softening of demand coming in 2018 and leading to a fall of about 1%.
Managing Director for Mace Cost Consultancy, Chris Goldthorpe, said: “Although we have seen a handful of projects affected by the referendum result due to occupiers reviewing their risks and appraisals, the vast majority of our workload is currently unaffected and contractors and supply chain companies remain busy, particularly in London and the South East.
“Despite this, we feel that the resulting slowdown in demand will lead to tender prices softening, leading us to revise our forecasts downwards. We believe there’s a strong role for industry to promote opportunities across the country and support mobility of goods, services and labour between the regions. With support from the Government and clear local engagement targets for major projects and programmes, this could help bring communities together.”
For an industry that was already experiencing a levelling off in demand, the Brexit vote will not help construction, at least in the short to medium term. Many contractors have been expanding and recruiting over the last three years and if order books start becoming harder to fill, competition will increase for the available workload and downward pressure will be put on profit margins and tender prices.
The extent to which tender prices will be affected is very difficult to predict as there is no precedent for the current situation. We know from past recessions that if the economy slows significantly, or even shrinks as predicted by some commentators, tender prices will fall. We take the view that the UK economy is reasonably robust since the recovery from the last recession, and that there is likely to be a slowing of growth over the medium term but not one that will turn into a major recession. This slowdown will reduce construction workloads, leading to increased competition which will reduce, or even reverse tender price inflation over the forecast period.
Mace’s Cost Consultancy business produces a quarterly UK Tender Cost Update, offering a snapshot of construction market conditions and movements to help businesses spot and understand trends across the industry and plan accordingly.