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Kier, Bouygues, Morgan Sindall exits suggest future 'output gap', say experts

12 February 2016

Kier has walked away from the Ram Quarter after failing to agree a final contract sum

A recent spate of three Top 10 contractors walking away from London projects after not being able to agree a final price with clients suggests that cost inflation and skills shortages could lead to an “output gap” – a mismatch between demand and the industry’s ability to deliver.

Kier became the third contractor to leave a major project this week, when it walked away from Chinese developer Greenland’s £170m London Ram Brewery job in Wandsworth, London.

Kier won the contract for the first phase of work last year and has been carrying out enabling works on the site. However, the contractor decided to leave the job after failing to agree a final contract sum.

The news follows earlier reports that Morgan Sindall and Bouygues UK had also walked away from major projects, both after completing enabling works but failing to agree a price for the main build.

Morgan Sindall walked away from a project to build a £39m student services centre at Cambridge University, while Bouygues turned its back on a £65m project at Great Ormond Street Hospital, for which it was appointed as preferred bidder last year.

"These aren't isolated instances. I believe that contractors are walking away from jobs before they commence because they are unwilling to take on projects on which the risk of either design, procurement or a combination of both are such that the out-turn margin is uncertain."

Jason Farnell, contract and management consultant

Michael Dall, lead economist at construction industry analyst Barbour ABI, believes the growing trend is the result of rising prices and tight labour resources.

He told Construction Manager: “The anecdotal evidence in recent months has suggested that supply side issues, mainly cost inflation and skills shortages, were the biggest risk to growth in the construction industry.

“The recent trend of contractors leaving schemes they were previously appointed on seems to confirm this. It is an indication of the difficulties the industry could face in the future as demand seems to be holding strong but increasing costs could lead to an output gap in the industry.”

Jason Farnell, contract and management consultant and director of Commercial Risk Management, says that there will be other cases of contractors making last-minute exits from projects that are deemed too risky.

“These aren’t isolated instances. I believe that contractors are walking away from jobs before they commence because they are unwilling to take on projects on which the risk of either design, procurement or a combination of both are such that the out-turn margin is uncertain.

“The recent events seem to indicate that contractors are now able to implement their risk management procedures and practice selectivity rather than needing to compromise themselves from the outset.

“There is only a limited amount of resource and the contractors are looking to reduce risk and increase certainty. Margins are still fairly tight, so I think most contractors would take a guaranteed 4% over a risky 8%.”

Bouygues has abandoned the Centre for Research into Rare Disease in Children at Great Ormond Street Hospital

On the Ram Quarter project, Construction Enquirer reported that Shanghai-based developer and builder Greenland had called on Kier to abandon its supply chain in favour of sourcing as much of the project as possible from China, including Chinese suppliers for cladding, drylining and kitchens and bathrooms.

But after consideration, Kier still decided to walk away.

A spokesperson for Kier told Construction Enquirer: “Client and contractor partners always have their own fixed points that cannot be breached in a moving market, but Greenland has been an excellent client to work with and we will support them until an alternative contractor is in place.”

A spokesperson for Greenland told the website: “We appreciate the work that Kier has done on The Ram Quarter project and we anticipate that works will be completed as scheduled with our new construction partner.”

This was later reported to be Ardmore.

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