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Tender Price Forecast

Monday August 10th 2020

The impact of COVID-19 on the construction industry, the wider UK economy and the global economy has been profound, the repercussions of which are likely to remain with us for a considerable time. According to the Office for National Statistics (ONS) construction output grew by 8.2% in May 2020 after falling by a record 40.2% in April 2020. Despite the growth in May 2020 construction output is still some 38.8% lower than in February 2020 prior to the full impact of the COVID-19 pandemic being felt. In the three months to May 2020 construction output fell by a record 29.8% compared with the previous three-month period driven by record falls of 30.3% in new work and 28.9% in repair and maintenance. The decrease in new work of 30.3% was on account of record falls in most new work sectors with private new housing and private commercial falling by 42.5% and 29.5% respectively during the three-month period. Following the record monthly falls across all construction industry sectors in April 2020, the month-on-month increase of 8.2% for May 2020 was due to an increase in new public housing of 42.1% and an increase of 21.4% in new private housing. May 2020 showed monthly growth across all sectors apart from public other new work and public housing repair and maintenance. The ONS has issued a public statement ‘COVID-19 and the Production of Statistics’ to explain their approach to providing information quickly during these critical times and the uncertainties in the data that may arise as a result. Nevertheless, the current ONS data clearly reflects the reaction the industry had to COVID-19 with the falls in March 2020 of 5.4% and April 2020 of 40.2% reflecting the effects of site closures and the suspension of works across the UK during those months whilst the partial recovery in May 2020 is due to the gradual easing of restrictions according ONS anecdotal information.

The wider UK economy has also been severely affected by COVID-19 with the latest GDP estimates published by ONS showing that UK GDP fell by 19.1% in the three months to May 2020. Whilst monthly GDP recovered slightly and grew by 1.8% in May 2020 from the record falls of 6.9% in March 2020 and 20.3% in April 2020, it is still some 24.5% lower compared with February 2020 before the full impact of COVID-19 was felt. The contraction in growth of 19.1% in the three- month period to May 2020 reflects the negative contribution across all major sectors of the UK economy with the services sector falling by 18.9%, production by 15.5% and construction by 29.8%. The impact of COVID-19 can be seen right across the economy with nearly all sub-sectors also falling in the three months to May 2020. The National Institute of Economic and Social Research (NIESR) are forecasting growth in UK GDP of between 8% to 10% for the third quarter of 2020. It goes without saying that the economic outlook for the UK remains extremely uncertain and, crucially, is dependent on how well COVID-19 is managed as the economy is gradually re-opened, including managing potential further spikes in cases of COVID-19 across the UK or in particular areas. HM Treasury’s Forecasts for the UK Economy from a variety of independent sources (medium-term forecasts) predicts a decline in GDP growth for 2020 of 8.3% before returning to positive growth of 5.8% in 2021, 2.7% in 2022, 2.1% in 2023 and 1.8% in 2024.    

Encouragingly, the IHS Markit/CIPS UK Construction PMI Total Activity Index rose sharply in June 2020 to 55.3 up from 28.9 in May 2020 and the record 20 year low of just 8.2 in April 2020 which represents the steepest increase since July 2018. The increase is attributed to the re-opening of the supply chain following stoppages and business closures in the earlier stages of the COVID-19 pandemic.

There continues to exist many uncertainties surrounding the impact of COVID-19 on the construction industry and in particular its impact on tender prices now and in the future. The industry is experiencing a turbulent mixture of both inflationary and deflationary factors. Revised Site Operational Procedures (SOP) and implementing social distancing measures reduces output resulting in an inflationary impact on cost due to reduced productivity, extended programmes, additional preliminaries costs and thickening. Other inflationary pressures arise from potential labour shortages and higher material costs due to possible shortages and the increased cost of imports due to detrimental currency changes and possible future tariffs following the end of the transition period in December 2020. The risk of a potential increase in the number of insolvencies, despite government assistance with the Business Interruption Loan and Job Retention Scheme, will lesson industry capacity, reduce competition and exert further upward pressure on tender pricing. However, a marked stalling of activity, weakened confidence, reduced demand will exert counteracting deflationary pressures as contractors look to secure future workload particularly smaller, more locally based contractors. Downward pressure is likely to increase on contractor margins as the tendering climate becomes increasingly competitive. At these uncertain times the treatment and allocation of project risk will be of even greater importance to both employer and contractor as will be the correct choice of the most appropriate procurement route which, possibly, may lead to a more collaborative approach across the industry in the coming months and years. 

A wide range of views are being expressed as to how deep and how long the economic recession will be, and what shape any recovery in the economy may take ranging from a quick ‘V’ shaped to a slower ‘U’ shaped or a prolonged ‘L’ shaped with several variations in between. Whatever shape the recovery does take it is evident that the marketplace is facing a period of uncertainty and likely volatility that is unparalleled in living memory.

The effect the pandemic, and the measures introduced to control it, will have on the market and tender prices in the short, medium and long term is impossible to state with 100% certainty and all forecasts will be subject to more uncertainty than usual. In line with most commentators we are forecasting a range of possible tender price inflation moving forward. Understandably in the circumstances we have revised downwards our previous forecasts of tender price inflation and our current projection is for tender price inflation to range between -3% to 0% in 2020; 0% to +2% in 2021; +1% to +3% in 2022 and +1% to +3% again in 2023.

Kevin Heaton – Chairman | E: kheaton@mdaconsulting.co.uk | T: 0117 929 2641

Note: Forecasts of tender price inflation are indicative only and actual inflation will be dependant on the particular circumstances of each individual project including size, procurement route, programme, risk transfer and the prevailing market conditions in each location.

For further information on forecasts of tender price inflation in your particular region, please contact your local MDA Consulting Ltd office.

Our Tender Price Forecast uses published data current at the time of writing which may be subject to revision in subsequent releases. As a result of differences in release dates the impact of COVID-19 will inevitably vary between publications.

Sources:

Office for National Statistics (ONS): Construction Output in Great Britain: May 2020 (date 14 July 2020)
Office for National Statistics (ONS): GDP Monthly Estimate UK: May 2020 (date 14 July 2020)
Office for National Statistics (ONS): COVID-19 and the Production of Statistics (date 19 March 2020)
National Institute of Economic and Social Research (NIESR): Monthly GDP Tracker (date 14 July 2020)
Barbour ABI: Economic and Construction Market Review June 2020
HM Treasury Forecasts for the UK Economy: a comparison of independent forecasts No 394 (date May 2020)
IHS/CIPS UK Construction PMI (date 6 July 2020)
Building Cost Information Services (BCIS)