Northern Ireland market intelligence survey

Northern Ireland market intelligence survey Autumn 2018 making the difference

1 Introduction The cost of labour, indicated by contractor perceptions, has increased marginally when looking back over the past six months Over the past six months, average contractor sentiment indicates that material costs have increased marginally Average contractor sentiment indicates that overheads have increased marginally when looking back since our Spring 2018 survey In the past six months, average contractor sentiment indicates that profits have stayed the same As we edge closer to the March 2019 Brexit deadline, and with continued political uncertainly in Northern Ireland, it is little wonder then that the results of the latest Northern Ireland Market Intelligence survey point to a general cooling of the construction sector across Northern Ireland. According to the majority of surveyed contractors, the construction market in Northern Ireland is expected to weaken with 60 percent stating the market is getting cooler. This is a large shift in comparison to our previous survey, in which only 22.2 percent of surveyed contractors reported the market to be cooling. The percentage of contractors describing the market to be warming has also fallen slightly by 1.1 percentage points, to 10 percent overall in our most recent survey. It should be said that although key planning decisions are causing delays to major investment across the market, the private sector appears to be taking up some of the slack. The commercial sector is the best performing on average according to our survey results and has been described as both buoyant and highly competitive resulting in some mixed views in our Q2 2018 survey results. The student residential and hotel sectors are also noted to be among the higher growth areas currently in Northern Ireland. On the other hand, uncertainty surrounding Brexit and political instability appear to be pinning back the Northern Ireland construction market. In particular, the low level of public sector tenders resulting from the political stalemate is having a significant negative effect on some contractors, especially those operating in Health and Education. There are obvious and justified fears that the market is being outperformed by the rest of the UK. This represents a risk to the construction sector, with reduced confidence potentially resulting in lower private sector investment and future skills shortages. Furthermore, there are signs that insolvencies in the supply chain for contractors are on the rise. To break the deadlock we would welcome any new legislation brought forward by the Secretary of State that will allow civil servants to take key decisions, allowing the release of procurements and spending for infrastructure projects. Turner & Townsend tender price inflation Northern Ireland 2018 1.2% Northern Ireland 2019 2.2% Northern Ireland 2020 2.7% Preliminaries have increased marginally according to contractor sentiment over the last six months

NI market intelligence survey autumn 2018 2 Tender and market conditions High competition and low prices - a challenging mix. Contractor sentiment indicates that strong competition continues in the market with competitive tendering (either single or two stage) being the preferred routes. This competitive tender environment remains a challenge for contractors. It s no surprise then that 60 percent of surveyed contractors prefer negotiated tendering as their preferred route as this allows for less risk and reduced price sensitivity with the market. Negotiated tenders are a rarity in the procurement of public sector contracts which indicates the market is relying on the private and commercial sectors to fill the gaps left by the lack of public sector projects being released. Latest contractor feedback suggests tender price inflation will increase by 1.1 percent in 2018, with a large range of 10.0 percentage points. Following 2018, contractor tender price forecasts increase in pace, with TPI growth of 2.4 percent expected in 2019 and 2.8 percent in 2020. Turner & Townsend forecast tender price inflation of 1.2 percent in 2018, 2.2 percent in 2019 and 2.7 percent 2020. 45% Current tendering conditions 55% n Cold Intense competition, not much work, prices low. n Lukewarm Strong competition, moderate tender prices. n Warm Moderate competition, moderate tender prices. n Hot Reduced competition, work easy to get, tender prices high. n Overheating Shortage of builders, minimal competition, prices very high. 12.5% 0% 5% 0% 15% 18.3% 38.5% Current contract or tender route 60% Preferred contract or tender route 20% 30.5% n Single stage n Two stage n Negotiated n Framework n Other n Single stage n Two stage n Negotiated n Framework n Other % Tender price inflation overview 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2022 2021 2020 2019 2018 n Turner & Townsend n Currie & Brown n Gardiner & Theobald n Gleeds n Contractor TPI forecase n Average exc T&T

3 Commercial work filling order books but capacity remains The prevailing air of uncertainty has naturally resulted in the market adopting a wait and see approach. There is an expectation that with little or no visibility of public sector pipeline the market will cool over all. With the commercial sector being the top performer it is hoped that it can take up some of the existing and expected capacity. As of the second quarter of 2018, surveyed fit-out and general contractors in Northern Ireland have recorded significantly stronger order book statistics when compared to our previous survey. On average, contractor order books are 74.8 percent full for the 2018/19 financial year, a 30.4 percentage point increase from our previous survey in the final quarter of 2017. Likewise, for the 2019/20 financial year, order books have increased by 14.5 percentage points when compared to our previous survey, with order books now 38.5 percent full on average. Into the 2020/21 financial year, order books are 15.8 percent full on average as of our Q2 2018 survey results. 10% Top performing sector % Private commercial 30% Regional construction market outlook 60% Public works Housing Infrastructure Warmer Staying the same Cooler Repair and maintenance Private industrial 15.8% 0.0 10.0 20.0 30.0 40.0 38.5% % of contractor order book filled 74.8% Average contractor current operating capacity (100% = full capacity) 2018/19 2019/20 2020/21 84.3% The market remains buoyant, but the ease of access to markets into Britain and the Republic of Ireland continues to drain the local skills pool. Construction activity appears centralised to Belfast with little activity elsewhere in the province. Additionally, our main growth sectors are student residential, hotels and commercial office space.

NI market intelligence survey autumn 2018 4 Regional output summary Total construction output in Northern Ireland in the first quarter of 2018 decreased by 6.5% compared with Q4 2017 and was 6.1% lower compared to the same quarter in 2017. Public housing Private housing Public infrastructure Private infrastructure Other public new work Other private new work m 250 200 150 100 50 0 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 Source: Northern Ireland Statistics and Research Agency Although the market does show some signs of strength, we are still experiencing a numbers of both competitors/ supply chain becoming insolvent which potentially would come as a result of delivering projects which have been tendered during recession but delivered within a postrecession market.

5 Labour and material inflation Percentage increase of construction costs in the last 12 months and the next 12 months - 12 months % + 12 months % Structural steel 6.9 5.5 Aluminium composite panel 6.7 5.4 Copper cable 6.5 5.3 Sheet metal 6.3 5 Reinforcement bar 6 5 Carpenter/Bricklayer 5.5 4.7 Carpet layer, Tiler, Plasterer 5 4.6 Aluminium curtain walling 4.8 4.4 Plumber/Electrician 4.6 4.4 Concrete 4.4 4.3 General Labourer 4.2 4.2 Site Foreman 3.4 3.0 50t crane 1.4 2.6 0.0 2.0 4.0 6.0 8.0 10.0 0.0 2.0 4.0 6.0 8.0 10.0 Labour shortages and supply chain stability continue to be key challenges facing our business.

NI market intelligence survey autumn 2018 6 Key challenges In terms of key challenges facing contractors in Northern Ireland, political instability and skilled labour shortages are the two categories having the largest impact on surveyed contractors. Conversely, insufficient credit availability and low workplace productivity are the two key challenges to have the least impact on surveyed contractors as of the second quarter of 2018. An important point to note is that contractors have expressed concerns on uncertainty caused by Brexit and the effect it may have on import duties and material prices. Other challenges voiced by contractors include: unrealistic budgets set by clients, a lack of resources and a shortage of medium to large projects available in the market. % Political instability 4.0 Skilled labour shortages 3.6 Government red tape, bureacracy, delayed approvals 3.6 Too many contractors chasing too few projects 3.5 Lack of confidence in the market to invest in new projects 3.4 Rising costs of construction 3.0 Excessive lead times 2.4 Difficult contractual and legal conditions 2.3 Adverse weather 1.7 The market is oversupplied, e.g. too many vacany appartments and office space 1.7 Low workplace productivity, inefficient and outdated work practices 1.5 Insufficient credit availability 1.4 0.0 20.0 40.0 60.0 80.0 100.0 Challenges are ranked on a scale of 1-5 according to their response n Little impact n Fair impact n Medium impact n Large impact n Major impact With no assembly in NI, decisions by Civil Servants challenged and the main driver for construction in Belfast stalled Northern Ireland offers little by the way of pipeline. The challenge for us is to maintain that workload in our other regions outside NI

7 The direction of construction procurement 10 years ago the procurement of public sector projects in Northern Ireland was characterised by: PFI and D&B, the contract of choice was JCT and contractors were selected using bespoke tender competitions (generally on lowest price or most economically advantageous submissions). In the intervening years since the economic crash there have been significant changes to the contracting environment with: n PFI projects all but dead and two stage tendering making an entrance; n An increasing number of contractors being selected from frameworks n NEC being the contract of choice with the Central Procurement Directorate (CPD) introducing standardised z-clauses; and n The consideration of mean narrow average tender evaluations. Mean Narrow Average as a means of assessing the pricing section of tender is a recent reintroduction in the Northern Ireland market, first being used by the Department of Education in their consultant frameworks some years ago and by the University of Ulster for their GBD Development. Whilst there are clear advantages in preventing the race to the bottom which is clearly evident over recent years and which can put contractors and consulting businesses in difficulty producing below par results, one is also aware that it could have potential challenges under procurement law. Whilst CPD and local Construction Industry are supporting this evaluation tool, all parties are aware of the potential risks arising from a disgruntled unsuccessful bidder where Mean Narrow Average is used. That being said, limitation periods set out in the Public Contracts Regulations 2015 may require action to be taken before results are known or risk being out of time unless the receipt of new knowledge can be proven. Also, more recently, CPD are considering the use of two stage tendering for the procurement of large public sector projects through consultation with the local Construction Industry after some high profile procurement failures. Two stage tendering is the process which sees contractors competing for preferred bidder status at stage one with more detailed negotiations between the client and the preferred bidder at stage two. The advantages and disadvantages are: Advantages n More flexibility than one stage tendering n Increased Employer involvement in its project n Can allow for an earlier start n Pricing is on more complete information n Risk allocation more developed n Deeper understanding by the contractor of the requirements n Less resource intensive for contractors at stage one n Collaboration can lead to better relationship during the construction phase n Methodology can adapt Disadvantages n The time gained in starting early can be lost in protracted negotiations n The preferred bidder may not be incentivised to be competitive once others excluded n Potential for procurement challenges n Additional fee incurred by the Employer for pre-construction services n If agreement is not reached between the parties the Employer will have to start again n Recoverability of fees is an issue if parties do not reach agreement There are some unrealistic budgets with a perception that the supply chain is significantly cheaper in NI compared to GB

NI market intelligence survey autumn 2018 8 Two stage tendering, prevalent throughout GB, therefore has many pro s and con s both practically and legally. As with all new procurement methods there will be lessons to be learned and the process will evolve with the industry locally. Frameworks are becoming increasingly common as a means of appointing contractors/ consultants and are something we regularly see in our practice. There are a number of reasons for this: n Political situation has impacted the procurement and delivery process for projects n Reduced risk of procurement challenges by using an already established framework n Cost of procuring reduced n Economies of scale It is therefore of vital importance that the industry is aware of frameworks being set up that include Northern Ireland. Frameworks have the potential to develop strong relationships between client organisations and the market which can be beneficial for both parties. There is a clear risk of being unable to tender for valuable works that traditionally would have been procured directly by the client. The landscape of construction procurement is ever changing and with the potential move to two stage tendering, mean narrow average and the increased use of frameworks, only time will tell if the industry really embraces them or if the industry itself will refer the matters to the courts for adjudication. Lisa Boyd Director Cleaver Fulton Rankin National Frameworks Turner & Townsend are on various national and local consultancy OJEU compliant frameworks, which are open to Northern Ireland Public Sector Organisations and Local Authorities, including: There is a higher demand and competition for work in NI, therefore our focus is mostly on the UK market.

9 We are currently facing cost increases in both labour and materials, however tender rates are not reflecting this. Case study McArthur Hall, Belfast Project Management, Cost Management and Full Design Team Services

10 NI market intelligence survey autumn 2018 10 Best described as uncertain, uncertainty of work load, uncertainty of completion and uncertainty of government spend, Case study Erskine House, Belfast Project Management, Cost Management, Principal Designer and BIM IM

About Turner & Townsend Turner & Townsend is an independent professional services company specialising in programme management, project management, cost and commercial management and advisory across the real estate, infrastructure and natural resources sectors. With 108 offices in 45 countries, we draw on our extensive global and industry experience to manage risk while maximising value and performance during the construction and operation of our clients assets. We been working in Northern Ireland for over 50 years. From our Belfast office our project, cost and advisory specialists work across the island applying our global expertise on local projects. Our People Colm Lavery Director, Real Estate and Strategic Lead t: +44 (0)28 9044 6999 e: colm.lavery@turntown.com Brian Thompson Director, Infrastructure t: +44 (0)28 9044 6999 e: brian.thompson@turntown.com John Robinson Director, Infrastructure Cost Management t: +44 (0)28 9044 6999 e: john.robinson@turntown.com Kris Hudson Economist t: +44 (0)113 258 4400 e: kristoffer.hudson@turntown.co.uk Belfast office: Arthur House, 41 Arthur Street, Belfast, BT1 4GB www.turnerandtownsend.com Turner & Townsend Cost Management Limited. This content is for general information purposes only and does not purport to constitute professional advice. We do not make any representation or give any warranty, express or implied, and shall not be liable for any losses or damages whatsoever, arising from reliance on information contained in this document. It must not be made available or copied or otherwise quoted or referred to in whole or in part in any way, including orally, to any other party without our express written permission and we accept no liability of whatsoever nature for any use by any other party.