Lowest-price tendering is forcing contractors to price their work at unrealistically low levels, which is likely to have serious consequences on the construction industry, according to ICAEW
In its Audit Insight report into the construction industry, The Institute of Chartered Accountants in England and Wales (ICAEW) warns that this race to the bottom could lead to not only more firms collapsing, it will also damage their supply chains, forcing more smaller firms out of business.
To combat this unsustainable procurement culture, the report provides practical guidance and recommendations to help ensure the long-term success of the construction sector.
The construction industry is a key driver of growth for the UK economy, but it is a fragile one with low margins and high risks. The ICAEW report highlights the key challenges construction companies face and provides recommendations to meet these risks before they become apparent in financial statements.
Andrew Hobbs, chair of the Audit Insights: construction working group and EY partner, said: “The construction sector is complex. Clients are often only looking for the lowest bid, which in turn encourages construction companies to offer unsustainable low prices in the hope that some aspect of the project will subsequently change to improve their profits. Unexpected changes can then 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 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 guide, Audit Insight: Construction – Bidding for lasting value, delivering for success, is available here.