Leading Consultant Advises Against Fixed-Price Contracts in Construction Industry
In a significant development for the construction industry, Turner & Townsend, a top consulting firm, has urged clients to rethink their reliance on fixed-price contracts. According to their latest Autumn market intelligence report, the firm warns that such contracts, which transfer excessive risk to contractors, are increasingly problematic as the industry grapples with various challenges.
Turner & Townsend’s UK managing director for cost management, Martin Sudweeks, highlighted that the construction sector is facing a series of hurdles, including labor shortages that are causing project delays, reducing productivity, and creating operational bottlenecks. Additionally, the sector is experiencing a wave of insolvencies and contractors are becoming more selective about the projects they bid for. This situation is further complicated by a shortage of available and reliable bids due to contractors' hesitance to engage in high-risk projects.
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Despite some stabilization in material cost volatility and a decrease in overall tender price inflation, Sudweeks emphasized the dangers of fixed-price contracts. These contracts, which offer a set price regardless of the project’s complexities or changes, tend to lead to inflated bids as contractors adjust for perceived risks. The consultant warns that such contracts may only attract bids from firms desperate for work, rather than those that are well-positioned to deliver high-quality outcomes.
Sudweeks advocates for a more balanced approach to risk management. He suggests that clients should aim for more equitable risk transfers and build partnerships rather than just seeking suppliers. This strategy would encourage better-quality bids and foster a stronger working relationship with the supply chain. Moreover, contracting directly with second-tier suppliers can enhance visibility and control over costs, while incentivizing contractors could boost their performance.
Sudweeks is optimistic about the sector’s prospects as confidence begins to return, buoyed by lower interest rates and an increase in new orders. However, he cautions that the construction industry is not yet in a buyer's market. As the Chancellor’s budget approaches this Autumn, he stresses the importance of sophisticated commercial models that balance risk and reward for both clients and suppliers.
So, the key to successful project delivery in the current climate will be careful risk management combined with collaboration and incentivization. Turner & Townsend’s insights reflect a crucial shift in how projects should be approached to ensure the successful realization of major real estate and infrastructure developments.
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