Ridge Partner Nathan Moss offers some essential advice for finding a firm to build your project, and making sure that they finish it.

In the year to February 2024, a combination of material price inflation, skills shortages, high borrowing costs and a cooling market drove 4,403 construction firms into insolvency, a 37% increase on pre-pandemic levels.

Main contractors have been particularly exposed to inflation due to low profit margins and pre-agreed long-term contracts, compounded by competition in a cooling market.

While inflation has reduced significantly in 2024, the market remains challenging, and the risk of contractor or subcontractor insolvency significant. But there are actions that clients can take to help reduce the associated risks.

Bring contractors along on the journey

Despite a cooling market, tier 1 contractors remain cautious, and they are selective about the jobs they tender for, particularly where they perceive significant risk. To enable the right level of competition, it’s important to engage early with the market and identify contractors with the right skillset, sector expertise and capacity. Where possible, sharing pre-tender information can help them understand the design and project risks, and increase interest.

Watch out for warning signs

Take a belt-and-braces approach to due diligence. There are various systems that provide an insight into the financial status of a contractor or its supply chain, but gathering information from the market can also yield valuable clues about commercial stability. Signs that a firm is in distress include poor performance, contract determinations and not paying suppliers on time. You might hear rumours that a contractor has been removed from a job or that subcontractors refuse to work with certain main contractors. These are all indications that a firm may be in financial distress. Further investigations should be carried out, and caution taken.

Be realistic about risk

Procurement strategies should be tailored to the size and complexity of the project and risk apportioned fairly. If a contractor feels that they’re being asked to take on too much, they may walk away, inflate their price, or overstress the supply chain. Risk should be reasonably allocated between the contractor and the client, and clients may need to accept a greater share to ensure a healthy competition.

Choose the right procurement strategy

Contractors still have a strong preference for two-stage tendering, where a preferred contractor is selected on its overheads, profit, and prelims, and the contract price is then negotiated based on the design. Even in a cooling market, contractors remain wary of single-stage tendering for all but the most straightforward projects. Going a step further, some clients are opting for construction management. This is where individual packages are let by the client, with a construction manager overseeing the procurement and build process. This process can be time-consuming and does involve greater client liability, but it is likely to attract more interest.

Set contracts up for success

Contracts should be set up to reduce the impact of insolvency – the use of a parent company guarantee, or a performance bond, is recommended. To support supply chain cashflow make sure that payment terms are back-to-back – so if the contractor is paid within 30 days, they pay subcontractors within 30 days too.

This is undeniably a challenging time for construction – it’s important to be proactive, engage early with the market, choose contractors carefully, treat suppliers fairly, and manage risk. These fundamentals are the key to a successful project and for developing strong relationships that will underpin future delivery, no matter how challenging the market.

Nathan Moss is a Chartered Surveyor and Certified Project Manager, and leads the Ridge Project Management division in Bristol. You can contact him at nathanmoss@ridge.co.uk, or find out more here about our Project Management services