Contractors are so desperate to win work during the downturn that they are submitting bids that are too low to make a profit.
Underbidding is most likely on contracts where there is direct competition rather than two stage tendering with the practice emerging across contracts in the public and private sectors and that only long-term frameworks, such as some government contracts, were immune to the practice, as price benchmarks were set in advance.
The latest figures from the Building Cost Information Service (BCIS) reports a fall of 2.4 per cent in tender prices for the first quarter of 2008, which remained the same for the second quarter.
The BCIS also reported that new work output is expected to fall in 2008 (-2.0 per cent) and 2009 (-3.0 per cent) with private housing and private industrial being hit the hardest, together with private commercial in 2009. Overall new orders for construction fell eight percent in Q2 of 2008 compared with the previous quarter and 20 percent compared with the same quarter the year earlier.
Andy Higgs, partner in King Sturge’s building consultancy team, warned that underbidding would severely damage firms that were already struggling with cash flow.
He said: “Tender prices are in free fall as contractors are buying turnover for the year ahead.
“Tender prices are coming back 10-15 per cent lower than estimated and some contractors are bidding on a zero-profit basis. With credit becoming harder to get, people won’t get through the downturn if their cash flow goes. If companies don’t have money to pay subcontractors they will go out of business.
“Organisations that are in a position to take advantage of these low prices and build now also need to be aware that they are taking a risk that the contractor may have bid so low that they may run into problems before the contract is complete.”