Keep close to supply chain as industry charts new territory

UK construction clients need to maintain close visibility throughout all levels of the supply chain as the industry focuses on getting back to work, according to Turner & Townsend.

The global professional services business’ most recent UK Market Intelligence Report warns clients to adopt agile strategies and remain alive to the risk of supplier insolvency, material shortages and contract liabilities as the industry prepares for an easing of lockdown restrictions.

Through analysis of past recessionary data alongside the most recent forecast from the Office for Budget Responsibility (OBR), Turner & Townsend projects that tender prices could deflate through to 2022 Q1 before inflating thereafter.

This hypothesis – tracking trends seen from comparable ‘shock’ recessions – uses tender price performance during the 1990s as an indicator of the largest reduction in tender pricing during a recession.

However, the report cautions against assuming a firm forecast, pointing to the supply-led nature of the current COVID-19 crisis being ultimately different to the demand-led nature of previous recessions.

Despite inevitable reductions to demand and Brexit uncertainty further paring back investment, there is potential for inflationary pressures to counterbalance deflation. Demand may not reduce across all sectors of the construction industry, with infrastructure, defence, health, life sciences and logistics expected to show strong growth. Furthermore parts of the supply chain could see reduced capacity from insolvency, lower on site productivity due to social distancing measures and disruption to domestic supplies and imports of construction materials.

In response to the uncertainty, Turner & Townsend is advising clients to support supply chains and increase scrutiny for signs of distress, being prepared to move quickly to change strategy and protect projects. The latest UK report includes practical steps that clients can take to increase visibility of and monitor programme performance.

Andy Outram, director and real estate leader for Scotland at Turner & Townsend, said:

“Market confidence in the construction sector in Scotland has been severely impacted in recent weeks, and as a result, workloads, materials/supplies and employment are likely to be dramatically affected in the next 12 months. As we start to emerge from lockdown, much will depend on wider market confidence, and support from the Scottish and UK Government.

“While OBR reporting points to a severe downturn in one scenario, demand going into the pandemic and Scottish Government backing for key projects could act as a catalyst for parts of the sector to recover. As part of this, the Scottish Government must explore how best to accelerate such key enablers as planning approval, building control and procurement of construction projects. This will ensure that public and private sector projects can progress in the “new normal environment”.

“What is also clear is that clients need to support supply chains and assess where vulnerabilities lie. In this respect, the review and work being undertaken by groups in Scotland such as Construction Industry Coronavirus Forum (CICV) will help with this and allow for project plans to adapt and advance under new processes.”

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