Analysis; Two Stage Tenders and the way forward for the Scottish Construction Industry

The widespread adoption of the two-stage tender model in recent years made a lot of sense for Scottish construction businesses. The aftereffects of the 2008 global financial crisis created an overheated construction market where margins were driven low whilst unsustainable risk was pushed on to contractors in pursuit of ‘value’ for the public purse. Something had to give and it did, in dramatic fashion, with the demise of Carillion in 2018. 

 

The two-stage model, in theory, allowed for greater transparency for client bodies in both project costs and risk in the preconstruction development phase, not to mention the increased efficiencies and preparedness that came with having early contractor involvement. 

 

It really was a ‘no-brainer’ for the Scottish industry with main contractors able to exert more influence over the balancing of risk and reward. The two-stage model should by now, have created the platform for a more sustainable basis of the delivery of construction projects and we should all be a little better off as a result.

 

But then came the pandemic, war in Europe and the resulting unprecedented cost inflation in construction material costs…… a set of circumstances that have arguably pushed the two-stage model to its limits, the move from phase one to phase two proving an increasingly difficult leap for most to make.

 

Over the last 2 years, an increasing number of our clients reported difficulties, particularly on mid-high value projects in the public sector. One Director of a prominent construction firm had invented his own term ‘Sliding to the Right’ as demonstrated by his wall chart of construction programmes showing commencement dates for new projects pushed out further & further into the future.

 

The reality was that a large proportion of projects procured throughout 2022 & 2023 were subject to some form of delay, with frustrations growing across many Tier One Contractors and as they toiled through, seemingly never ending negotiations with clients – it was described most accurately to me by one Construction Director as ‘Groundhog Day’. In recent months we’ve seen this filter through to smaller value projects affecting a significant number of SME construction businesses, who whilst not formally engaged in two-stage tenders, are still affected by the underlying problem; affordability.

 

Finding the extra funding to cope with these, often vast, increases in delivery costs is no easy task. Attempts at ‘value engineering’, to find further cost savings have proven futile as those very savings are outstripped by cost inflation in that same period. For many involved in that process, there’s a sense of being caught on a ‘hamster’s wheel’; pedalling hard but getting nowhere.  

 

The first, very obvious thought, is that there is simply a backup in the system and if we all just give it a bit of time, it will begin to clear. I titled my review of 2023 ‘A Game of Patience’ in recognition of that. It could well be that with a settling of inflation rates in 2024 a more predictable climate will emerge allowing client bodies to make more sure-footed cost plans (albeit recent industry reports would suggest not). 

 

There is a political backdrop to all of this that can’t be ignored. Some difficult funding decisions do need to be made but with elections looming in both UK and Scottish parliaments, there’s a very real threat of a ‘soft-pedal’ approach being taken. It will be tempting for politicians to kick the can down the road, leaving those difficult decisions to their potential successors. Needless to say, this will only add to the stalemate. 

 

From a recruitment & skills perspective, the stark reality is a stagnant market offers very little opportunity for development and progression. More worryingly, we hear regular reports from highly experienced construction professionals who have been so ground down by this process, that they are walking away from the Tier One world. A few have even resorted to serving notice with no job to move on to – instead relying on savings to see them through rather than persevere on the phase one treadmill. The industry can ill afford to lose that kind of talent and experience. 

 

So in the face of that, questions should be asked. The answers may be harder to find but what has been striking from my own conversations with construction leaders is that it has taken some time to realise the full extent of the problem. This is understandable with few opportunities to explore these challenges at an industry level  – and let’s face it, we can all be kept busy enough with the daily ‘whirlwind’ in front of us. So, if nothing else, there is a definite need for more open discussion. 

 

In the final reckoning, it may well prove that the protections afforded by the two-stage model make it the most viable option on the table for the industry. But it increasingly feels like being the lesser of two evils rather than the pathway to sustainable profitability that was promised. 

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Posted by Jamie Porter
8th March, 2024
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