Raymond Doherty 27 Mar 2019 03:59pm

Construction contracts in dangerous race to bottom, says ICAEW

UK construction companies are offering unsustainably low prices for work, which will hurt the sector long-term, analysis from ICAEW has found

The “race to the bottom” could lead to more businesses collapsing, damage supply chains and force smaller companies out of the market, the ICAEW report Audit Insights: Construction – Bidding for Lasting Value, Delivering for Success, has found.

Construction relies on low margins and high risks. Even the largest players can fall in to the red as the result of a couple of contracts.

In addition, there has been the longest decline in bank lending for construction companies since 2011 – because of fears of a downturn in the economy and Brexit – at a time when firms need to manage their debt. The collapse of Carillion and the failures at Grenfell are just two examples of the “hugely significant risks affecting the sector,” the report points out.

The sector currently contributes 6% of all UK GDP, which equates to £110bn per year and it employs 2.4 million people.

“The construction sector is complex. Clients are often only looking for the lowest bid, which in turn encourages construction companies to offer unsustainable low prices in the hope that some aspect of the project will subsequently change to improve their profits,” said Andrew Hobbs, chair of the Audit Insights: Construction working group and EY partner.

“Unexpected changes can then turn small profits into losses and make it difficult to return a particular project to profitability,” he added.

The report, in which ICAEW collaborated with auditors experienced in independently examining and auditing construction businesses, makes a number of recommendations. These include: procure and bid responsibly and deliver consistently across the lifetime of a contract; work collaboratively with stakeholders to help plan for the future; address the shortage of skilled labour; be more transparent in its reporting; and provide more investment in commercial and operational technology advances and R&D.

“A robust approach to responsible project procurement and bidding is essential and needs to be supported by both sides,” Hobbs said. “Contractors need to be more selective over which projects to bid for and ensure that they properly understand the risks. Clients need to ensure that tenders are based on best value and past performance rather than cost alone, and that they include performance incentives.”

Earlier this month, major construction services company Interserve, which holds a number of government contracts, fell into administration.