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Debate: Rising tender prices

Civil engineering workload is on the brink of a boom, and everyone is talking about skill shortages and a general lack of capacity. But does this mean contractors are about to jack up their tender prices?

This week we ask: Is it inevitable that tender prices will rise with the expected upsurge in civil engineering workload?

Yes

I certainly hope so!

The basic laws of economics suggest that if demand rises, sellers should be able to raise prices.

However, there is a more complicated situation in the construction industry as there is overcapacity among contractors but a developing skills shortage.

There are also fewer people choosing a career in construction.

Many of today's experienced workforce are in their 50's and soon many of these people will leave the industry. There will be a skills crisis unless the recruitment trend is reversed quickly.

All this suggests that there will continue to be consolidation within the industry and a rise in tender prices.

This is not necessarily a bad thing for clients.

Over the last ten years the construction industry has consistently underpriced itself, weakening itself with little long term benefit to clients.

Clients are becoming more sophisticated and the acknowledgement that lowest tender price does not necessarily realise best value is now spreading.

Procurement, pricing and evaluation methods are evolving in line with the development of best practice initiatives and guidelines.

Rising workload will provide clients with greater opportunities to implement change in this area and consolidation of the industry will give contractors greater scope to decide for whom they will work.

Profit is crucial and contractors are also becoming more sophisticated in their ways of achieving it. Successful contractors will not continue to tender at unsustainable margins but will concentrate on improving their skills, increasing their efficiency, reducing waste and developing innovative solutions. This will allow them to make consistently satisfactory profits while delivering good value to their clients.

Improved margins will allow pay and training budgets to increase significantly, helping to attract and retain more of the right people in the industry.

To summarise, I think tender prices will rise but clients and contractors must work together to ensure this is to the long term benefit of the whole industry.

No

If people carry on in the normal way, and repeat past behaviour - if contractors seek to exploit the demand situation or if we are lazy - then yes, tender prices will rise. That has to be a very real danger that Railtrack and all major clients must recognise.

But we must not allow the boom-bust cycle to repeat itself yet again.

The message is simple and stark. Railtrack has to deliver an increased volume of activity within tough financial constraints set by the Rail Regulator and with defined outputs to achieve.

We are simply not going to be in a position to afford or accept inflated prices.

The stop-go cycle is not in anyone's interest. If the contractors increase profit margins during this part of the cycle, they perpetuate the fact that during the down turn the clients will exact their revenge by driving the margins down.

Increasing tender prices due to the upsurge also assumes that we all continue to use short-term tendering and price driven contract awards.

Instead we are aiming for a more stable, productive, longer term contracting environment.

We are looking for a joint approach which will release best value for money and address with contractors key issues such as skills shortages.

We also have to work together with the industry to try and stabilise price fluctuations, because they compound industry problems of budgeting and planning workloads - and will jeopardise delivery of outputs.

It is up to the industry: does it want short periods of high profit margins followed by closures, lay-offs and bankruptcies? Or does it want reasonable profit margins on a longer, more stable baseload of work? It is all about not killing the goose that lays the golden egg.

The outcome of the Regulatory review will provide an opportunity for the industry to plan future workloads with a greater degree of confidence and certainty.

But if part of the increase in Government funding of the rail industry were to get used in cost inflation, rather than improved outputs, then the industry will have squandered a unique opportunity.

The facts The Government's 10 year transport plan is expected to create a major shortage of skilled construction staff. It assumes that £185bn of public and private money will be spent on transport projects between April 2001 and March 2011.

NCE's analysis of the latest construction forecasts from the Construction Products Association, Construction Forecasting & Research and Hewes Associates shows that civil engineering will be the fastest growing sector over the next two years, producing 11.8% growth during 2001/02.

The Construction Products Association predicts double digit growth in the roads sector over the next two years.

The upsurge in civil engineering workload is expected to come just as the commercial property sector goes into decline.

In the 1980s construction boom widespread skill shortages encouraged strike action as steel erectors walked off sites in London. Clients responded by increasing the use of imported steel.

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