Client Satisfaction and the Price Of Construction:
Gleeds’ Critical Construction Market Review Third Quarter 2009
Mixed Messages Client Satisfaction
‘Economic conditions can and do change rapidly’ The UK Construction Industry Key Performance Indicators
Bank of England
(KPI) Launch 20093 reports that:
• From 2000 up to the end of 2008 an average of 48.2per cent
Both Halifax and the Royal Institution of Chartered Surveyors of projects completed on or under anticipated cost. For 2008
(RICS) are reporting positive movement in respect of the the actual figure is 48 per cent
• From 2000 up to the end of 2008 an average of 43.2 per cent
Halifax quotes an increase in house prices of 1.1 per cent in of projects completed on time or in advance of the
July and notes an overall increase in house prices for the three construction programme (peak was 58 per cent at 2006-07;
months to July of 0.8 per cent. This increase is the first rise on 45 per cent for 2008-09).
a quarterly basis since October 2007.
This means that in excess of 50 per cent of projects do not
However average house prices in July 2009 remained 12.1 traditionally complete to the anticipated cost and similarly more
per cent lower than July 2008; this may be fuelling demand then 50 per cent do not meet the construction programme.
which has been improving steadily since January 20091 with Different procurement routes do not appear to significantly
approvals on secured dwellings back to levels last seen in impact on extent of cost certainty.
This data relates to a time before the full impact of the
RICS anticipates that instead of the previously reported 10 - recession on the construction industry was realised
15 per cent house price fall for 2009, house prices will start to
increase ending up, by 4Q2009 slightly higher than at 4Q2008.
Construction Project Pricing Levels
In contrast, Gross Domestic Product (GDP) a measure used
by many to establish ‘recessionary conditions’ has fallen now Building Cost Information Service (BCIS) indices show a
for five consecutive quarters2 and whilst GDP fell by a reduced continued fall in tender prices since 2Q20084 and this trend
rate for 2Q2009, it is still a fall on the previous quarter. Output is set to continue into 2010. However construction materials
within the construction industry fell by 2.2 per cent for 2Q2009 price indices identify that whilst some material prices have
compared with a decrease of 6.9 per cent in the previous fallen over the last 12 months, on the whole prices have
Bank of England Statistical Releases
ONS Statistical Bulletin 24 July 2009
KPI Consortium including Constructing Excellence and the Department for Business,
Innovation and Skills (BIS)
BCIS All in TPI 31 July 2009
The Profit Motive by increases in their pricing levels. If the contractor lets
sub-contracts at this point in time then the contractor
Theoretically, if a business seeks to make a profit then it needs may be faced with these rising prices. Because there is a
to ensure they provide the quality of goods and services that financial ceiling to the fixed price building contract, the main
people want otherwise they will be put out of business by contractor could see overhead and profit recovery diminish.
those who can better provide those goods or services.
In this scenario the contractor may refer back to the
There are many businesses involved in the process of
terms of the contract to look for avenues to recover cost
construction and those managing and constructing work in
(it should be noted that both the Royal Institute of British
the building industry do so in order to make a profit. The
Architects (RIBA) and the RICS have reported an increase in
level of profit realised will be influenced by many factors
adjudications in 2009). Likewise the employer may increase
including the state of the economy and extent of competition.
pressure on the contractor by looking for opportunities to
reduce the final account. In addition, amended contract
The Construction Project Conundrum terms can extend payment periods impacting on cash
flow and as a result contractors et al may be faced with a
In a time of recession when available work reduces, reduced workforce due to redundancies.
competition increases. In an industry which traditionally
awards projects based on lowest cost the competitive Either situation is unlikely to improve client satisfaction in
edge comes in terms of cost; in order to become ‘more terms of cost certainty and programme predictability as is a
competitive’ consultants, contractors and sub-contractors contract terminated due to default and insolvency.
can reduce profit and overhead recovery and potentially may
While some contractors and employers will try to take
submit bids at a loss.
advantage of economic instability, some will remain
Looking simplistically at the structure of a fixed price focused on delivery and quality, trying to ride out the storm.
construction contract for a project with a long construction Contractors on fixed price contracts may seek to limit
duration, the contractor will commit to a lump sum price in financial risk at the potential cost of reduced profit by letting
advance of works starting on site. all sub-contract and supplier packages as soon as possible
into the building contract based on fixed price terms for
Going into a recession the contractor can take advantage the duration of the contract. The use of credit checks can
of greater competition from sub-contractors and suppliers, give some security regarding the financial position of sub-
potentially increasing the profit margin. However, sub- contractors however sub-contractors may then still be faced
contractors and suppliers will start to feel the effects with rising supply costs.
of material and labour price increases as the industry
moves out of recession and this may in turn be reflected How do they recover their costs whilst remaining in business?
Theorectical profile of project costs going into and coming out of a recession
(for lump sum projects)
Contract sum Pressure pushing nal
account sum up
Contractor pro t margin
Pressure pushing nal account
Potential to increase pro t
Entering recession Time Coming out of recession
Final thoughts… The Gleeds Economic and Regional Inflation Report takes
a national overview of inflation and examines the influences
‘The real price of everything…is the toil and currently affecting the regional construction market in the
trouble of acquiring it’ UK.
Adam Smith, The Wealth of Nations 1776 To view the 3Q2009 report (year on year) visit www.gleeds.com
Each party involved in the construction process can measure Legal disclaimer: This paper was prepared by Gleeds to advise on the construc-
the success of a project in a variety of ways for example in tion market. It is for general information only and neither Gleeds nor any of their
partners, employees or other persons acting on their behalf makes any warranty,
terms of profit, performance or value for money. express or implied and assumes any liability with respect to the use of the informa-
tion or methods contained in this report to any person or party.
However, the strive for each party to procure a service at
lowest cost in the face of increasing resource prices will
potentially result in some organisations in the construction
chain failing to survive (the number of compulsory liquidations
of construction businesses increased by approximately 50 per
cent in 2008) and some choosing not to.
The need to make a profit in a competitive market should
benefit that market. The difficulty for the construction
industry is that sometimes performance, quality, price and
profit do not appear to be related.
The challenge is therefore to establish that price contains a
reasonable level of profit and that performance and quality
are not jeopardised as a result of that price. This is key
when an industry (may be) coming out of a recession.
For additional information contact:
Sarah Davidson or Jonathan White
Gleeds Corporate Research & Development
1 Clifton Lane
Nottingham NG11 7AT
Tel: 0115 977 8000 | Fax: 0115 977 8002
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