Most commentators had predicted that the decline in construction tender prices would have slowed by this stage and that following the steep drop in prices during 2008 we would see only a further low single figure drop in prices during 2009.

The rationale behind these predictions was that contractors could only sustain a policy of below cost tendering for a short period and would then be forced to revert to a more sustainable level, of at least breakeven, by their declining reserves and negative levels of profitability.

The reality in the market place however is quite different and we continue to see tenders being submitted at levels significantly below cost in order to obtain a share of the ever dwindling number of new projects available.

With virtually no new private residential or commercial projects coming to market contractors are relying on a small number of publicly funded projects in order to maintain their key staff members. Competition for these projects is so intense that contractors are now pricing work at up to 20% below cost!

Unsustainable
This, of course, cannot be sustained for any prolonged period without incurring severe financial pressures leading eventually to insolvencies. Unfortunately we are already seeing several examples of this with the demise of some sub-contractors and smaller main contractors.

Indeed this trend is not limited to contractors and we have also seen the almost unprecedented winding up of a number of design consultants both here and in the UK.

So, where will it all end? The answer can only be in tears, with further good firms being forced into bankruptcy. Because of the severe shortage of new work, contractors (and consultants) are tendering for projects at ever lower levels. While some of these losses can be passed down the line to sub-contractors and suppliers, they all cannot.

The problems are also further exacerbated by slow payments or in the case of some private sector projects reduced payments or even no payments at all as developers struggle for their own survival.

For public sector projects, contractors are accepting the risks associated with the new Government contracts without pricing in any premium. If these risks actually materialise then a very serious position is made disastrous.

Adversarial
Inevitably, this will all lead to a situation where our industry becomes more adversarial. Contractors will be forced to seek additional compensation wherever they can in order to try to mitigate their losses. They will have to pursue legitimate, semi-legitimate and spurious claims which will waste resources on both sides of the argument.

This approach will cause friction between members of project teams and divert attention away from the primary focus of getting the project completed.

In recognising the reality of the current marketplace, it is important that steps are taken to protect clients’ interests as much as possible. Even greater care should be exercised when preparing tender lists to ensure, in so far as is possible, that all contractors and key sub-contractors are reasonably financially sound. This should involve examination of latest accounts and carrying out of credit checks.

The difficulty, of course, is that in the current climate, audited accounts are likely to be well out of date. This necessitates the examination of management accounts which are not independently produced and, in difficult trading conditions, may not accurately reflect the firm’s current financial position.

Bonds
Before projects proceed to site it is also important to secure an adequate performance guarantee bond. This will normally range from 12.5% to 25% of the contract sum and will be available to offset additional costs in the event of contractor default. While this will mitigate against financial loss it won’t, however, help with delays to the project.

For that reason selecting the correct contractor at the outset is more important. In these uncertain times it is also important to ask how financially strong is the company providing the bond?

Bonds should only be accepted from long established reputable firms with a history of doing business in Ireland.


This article was written exclusively for irishconstruction.com by Derry Scully, FSCS, FRICS. Derry is Chairman of Bruce Shaw Partnership Dublin and a Past President of the Society of Chartered Surveyors. He represents the SCS on the Construction Industry Council.

Catch up with Derry at the National Construction Conference 2009, where he will be speaking about the challenges and opportunities facing the industry going forward. Click here for more details >>