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Contractors shelved for £1bn work as Essential opts for offsite self-delivery

23 February 2016

Essential’s projects include Theatre Square in Swiss Cottage

London-based build-to-rent developer Essential Living has stood down its Tier 1 framework contractors to self-deliver a £1bn pipeline of projects – a decision prompted by the “unprecedented” prices and delivery risk offered by the market.

Essential Living’s projects include Theatre Square, a £100m regeneration project in Swiss Cottage creating around 200 homes, and the £200m Perfume Factory project in Acton, which create 550 new homes.

Mark Farmer, chief executive of newly-formed construction consultancy Cast, which has advised Essential Living, told Construction Manager that the decision was part of a “mood shift” among developers faced with escalating prices and a lack of market capacity. 

“It was a strategic decision, looking at the amount of work, the state of the market around pricing and delivery certainty, and they decided they wanted to take more control and not be so reactive to market conditions.

“It’s not something that all clients would want or be able to do, but it’s trying to get maximum return for investors and therefore avoiding a conventional lump-sum contracting route.”

"Construction prices have advanced beyond the point where it's not affordable, and some projects are no longer viable. Particularly where third party investors or funders are involved and need to make a return, it looks like some schemes that were anticipated might not happen."

Mark Farmer, Cast

He added: “There’s definitely a mood shift among developers – construction prices have advanced beyond the point where it’s not affordable, and some projects are no longer viable. Particularly where third party investors or funders are involved and need to make a return, it looks like some schemes that were anticipated [by contractors] might not happen.

“It’s a call to the market – things are starting to get difficult and although the situation will rebalance [when resources become available] it’s a question of timing.”

Farmer also indicated that there was little evidence of overseas investors seeking to bring contractors from their country of origin to the UK, either independently or as part of a joint venture.

“There are definitely barriers to entry for contractors to work in the UK, which makes it more difficult than it might appear on paper. Certainly, overseas firms may get a foothold, but it’s not an overnight fix.”

Essential Living says it will now seek to increase its use of offsite and will engage directly with subcontractors and suppliers across its portfolio, as well expanding its in-house construction management capabilities.

The company has already developed a trade contractor framework, in addition to brand suppliers that deliver key elements of its standard specification, such as kitchens and bathrooms.

Farmer declined to indicate the percentage savings on capital costs sought by Essential Living as a trade off for taking control of its own construction risk.

“There are varying degrees of opportunity to better the traditional pricing in the market, such as increasing the ability to use offsite construction, or a hybrid of offsite and conventional. price comparisons vary from project to project, but we’re looking to build long-term relationships with offsite suppliers. Build-to-rent has many standardised elements, and discussions are taking place,” he said.

In a press release, Ray Theakston, construction director at Essential Living, said: “This is about giving us greater control and will allow us to have a more hands-on management of cost and, crucially, risk, which we are simply no longer willing to pay for using a main contractor. 

“Design and build contracts have been on the rack for a while now and we are of the opinion the market has now reached a tipping point.”

Comments

Quite astonishing comment "construction prices have advanced beyond the point where it’s not affordable" when BBC sources quote huge profits for the major builders and London prices are at astronomic levels. Sounds more like an extra profit was spotted in cutting out the contractor and the maximum price could be squeezed from each property when it was ready in this "risky" market. Surely the main risk is with buyers who may end up with negative equity when this crazy price bubble bursts and the usual suspects are bailed out again.

M Floyd, 23 February 2016

We are working on a couple of projects where we are engaging the supply chain direct on behalf of the client and have found this enables a much earlier assessment of risk. We have found suppliers are more willing to collaborate directly at feasibility stage than they would via a traditional main contractor-led approach. A direct approach helps to align the supply chain to the developing design and to mitigate risk, as opposed to transferring risk only to be factored in later in the procurement programme. In my view a contractor's expertise is better utilised at feasibility stage on a consultative basis in relation to sequencing and coordination - with the support of independent commercial management to co-develop the supply chain with the client and the team.

Stuart Davidson, 26 February 2016

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