einsidetrack : Building Construction News - A return to growth looks likely, but will it last? by Dave Griffin, EC Harris

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) October 23, 2009 -- The market has contracted a long way and it will be years before we return to the levels of two years ago; however our survey has found that design consultants, the people at the start of the chain, are seeing an improvement in both the quantity and quality of inquiries.

Bearing in mind that there is much hue and cry in the press about the banks hanging on to "our" cash and not lending enough out to stimulate economic activity, why then, are we seeing positive signs?

The G20 recently congratulated itself that the package of economic stimulation measures has worked and that apparently seven million jobs have been saved worldwide! Whilst it is not clear how this immense total is calculated it is certainly true that Government spending has done something with investment on schools, academies and infrastructure providing opportunities to replace part of the lost capacity.

However, both the Prime Minister and the leader of the opposition have admitted that spending cuts will have to be made to re-balance the finances and capital projects are clearly in the front line.

Going almost un-noticed by the majority of the population, the stock market has been rising steadily over the summer and this was always a source of raising capital. Some developers are finding that at last they have room to manoeuvre.

Early in 2009 this column speculated that clients that had money would hold on to their cash until they felt they could achieve the best deal which we felt would be in the autumn. The upturn in interest is timely.

The general feeling among a number of contractors we have spoken to is that 2010 will be tight, but there will be enough going on to keep things moving. However, 2011 looks like a major concern. The post election construction industry will face even bigger challenges than we face now unless the commercial end of the market starts to move.

Raw materials

Copper appears to be reasonably steady but the trend for steel is still upward. This is a mixed blessing for manufacturers of finished goods. Market forces suggest that prices should be dropping which will obviously result in downward pressure on the price of plant and equipment, but many firms have already taken pay cuts and optimised their supply chain. They have nowhere else to go. The relentless increase of materials over time has almost eliminated the opportunities to discount substantially.

M&E sub-contracts

Predicting trends for subcontracts gets more difficult with each passing month as different sectors are reacting in different ways to the market.

* Commercial offices - We are seeing some interest both in refurbishment and new build but reports from main contractors are seeing a 15 per cent reduction in tender prices. This is almost certainly exacerbated by the tendency of some of the contractors who have specialised in this sort of work to lack diversity.

* Fit-out - There is increasing interest in carrying out projects which have been suspended waiting for better times. It is an encouraging trend and let's hope it continues.
* Residential - RSLs were told by the Conservatives to "prepare for the worst!" Affordable housing is another area which could be hit by spending cutbacks even though a lot of money has been allocated to it in recent months. High quality residential remains quiet but there are some schemes starting to move as money is made available.
* Hotels - This is still quiet but there are some schemes which are pushing forward.

* Data centres - This is another reasonably buoyant sector. Some projects which had been cancelled or suspended are making a comeback. Most consultants have specialist teams dealing with these highly technical spaces and the contractors have followed suit.
* Health - This sector is also showing signs of improvement, but is very susceptible to cutbacks.
* Education - So much has already been spent and more is scheduled. The Prime Minister says the schools building programme is sacrosanct but that cuts will have to be found in other areas of education. The market is unsure what the implications of this statement are. Watch this space!

* Infrastructure - This has benefited from massive investment but there is still concern over long awaited projects such as Crossrail. BAA still have an aggressive programme of expansion at both Heathrow and Stansted but this is likely to be heavily reliant on the sale of Gatwick.
* Public - There are major projects both in local and central government coming to fruition. A large proportion should get the go ahead. The makeover of the Palace of Westminster is probably the most high profile where huge investment is required to get many of the public buildings up to standard.

* Retail - Some chains have expansion plans which have been slowed down but this is still a buoyant sector if a little more competitive. Traditionally this sector has traded on long standing relationships which produces predictable tender prices but even here there is a downward price trend.

Consultants

It has been tough going on the consultancy side of the fence and most firms, both engineers and cost consultants, have been through at least one round of "right sizing" or redundancies as we used to call it, and some have been forced into pay or benefit "reviews" or cuts as we used to call them.

Clients have shown a willingness to follow the bottom line that many would not have foreseen in that they are willing to take a chance on the cheapest consultant even if they are unable to demonstrate a track record in the proposed type of work.

The obvious result is a price war to win work which will have far reaching effects which will be played out over the next two year or so.

A strong brand is important but more important is the ability to demonstrate value for clients. Everyone has to do a lot more for a lot less at the moment with survival the name of the game.

Having said that, there are more opportunities around to help keep things going and many feel that the worst just might be over.

Contractors

The same cannot be said for the contractors who still have the toughest times ahead of them. The projects the consultants are working on now are at least a year away (probably longer) from hitting the market which means the hole that is opening up in some order books will get bigger in 2010 and may only start to close up some way into 2011.

Prices are still holding up reasonably well even though there has been some discounting.

The recent trend for main contractors to buy m&e contractors as the in-house resource has meant that it has been increasingly difficult to assemble truly competitive tender lists, which has also helped support prices on larger projects.

Sustainable growth is the long term aspiration but it is far more likely that with government funding drying up over the next year we may in fact experience a gentle rise and a further dip in 2010 leading to a chilly 2011.

"One swallow does not a summer make", but the autumn should see some market growth. Let's hope it lasts.

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