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Price cuts in the construction sector put firms at risk warns ICAEW

Lowest-price tendering is forcing contractors to price their work at unrealistically low levels, which is likely to have serious consequences for the construction industry, according to a report by the Institute of Chartered Accountants of England and Wales (ICAEW). 

Its Audit Insight report into construction warns that this race to the bottom could not only lead to more firms collapsing, but will also damage supply chains, forcing more smaller firms out of business. The report offers practical guidance and recommendations to help ensure the long-term success of the construction sector and the businesses that work within it.

It points out that the construction sector is a key driver of growth for the UK economy, but it is a fragile one with low margins and high risks. The report highlights the key challenges for construction companies and recommends ways to meet these risks before they appear in financial statements. 

“The construction sector is complex," said Andrew Hobbs, chair of the Audit Insights construction working group and EY partner. "Unexpected changes can turn small profits into losses and make it difficult to return a particular project to profitability. A robust approach to responsible project procurement and bidding is essential and needs to be supported by both sides. Contractors need to be more selective over which projects to bid for and ensure that they properly understand the risks. Clients need to ensure that tenders are based on best value and past performance rather than cost alone, and that they include performance incentives.”

The report warns that the construction sector must do more to embrace innovation and technology, as well as attracting and training new and diverse skilled labour if it is to be fit for the future.

“The sector will need a labour force that has the right skill-set to work with new technologies and new manufacturing methods," Hobbs said. "Currently the construction industry, like many others, is experiencing a shortage of skilled labour. This must be addressed as quickly as possible. This means showcasing the diversity of roles required, including planners, architects, surveyors, engineers and skilled trades people if the sector is to attract young and diverse new workers.”

This article was first published in March 2019.