Subcontractors are dropping prices but at what cost?
Simon Herod, International Lead, E1
Although economic climate is affecting construction businesses of all types and subcontractors in particular are feeling the pinch. According to a new report by S&P Global/CIPS UK Construction PMI, this is now causing subcontractors to significantly reduce their prices to fill gaps in job orders – a worrying trend given the already tight margins they’re contending with. But why is this happening?
Respondents flagged a shortage of tender opportunities and a growing trend of delayed decision-making. This can set back construction timelines and frustrate people wanting projects to be green-lit.
So, what is happening in the industry to create such a price-driven market and how can subcontractors navigate these new challenges?
Stiff competition
More competition within the construction industry is the main reason for the change. Economic instability means demand for construction projects has become inconsistent, causing work to go up and down. Less work means more competition and subcontractors are being forced to battle it out to secure projects – and no better way than to drop prices. This makes their businesses more attractive to buyers, especially in this cost-driven environment.
Economic instability means demand for construction projects has become inconsistent, causing work to go up and down.Other factors include – global economic uncertainties, caused by political changes such as Brexit and recent conflicts are making clients more cautious, all of which have a knock-on effect on subcontractors trying to lock in that crucial next job.
It also means that clients, more than ever, are price-sensitive and it’s now essential that they find ways to reduce the cost of projects wherever possible. To stay relevant and to stay competitive, are being forced to slash their prices.
What’s the real impact?
To many, a drop in price may, at first, seem an attractive prospect but if we delve deeper, it’s likely to cause more harm than good. Firstly, less profit for subcontractors may increase financial pressure on struggling businesses. The last few months alone have seen a string of high-profile insolvencies, suggesting that it’s already having an impact.
To many, a drop in price may, at first, seem an attractive prospect but if we delve deeper, it’s likely to cause more harm than good. Adding insult to injury, smaller businesses are likely the ones who take the biggest hit. The larger firms work with more business security and are better placed to navigate tough economic climates. Smaller firms, however, are rarely afforded that luxury.
Again, this leads to more stiff competition from smaller businesses and perhaps further price drops – it’s a catch-22 and is good for no one.
Quality and standards
However, perhaps the biggest and most important issue is the impact this has on building quality and standards. You don’t need to be an industry expert to understand that once an industry becomes a buyer’s market, then quality control is one of the first areas to suffer.
A race to the bottom in terms of pricing puts cost, above all else. A race to the bottom in terms of pricing puts cost, above all else. It’s also important to remember that often, those willing to work for the lowest price do so because they either misinterpret the work involved or lack the expertise to understand the level of complexity. Again, this isn’t good news for building safety, particularly at a time when the industry is striving to raise its game across the board.
Putting a strategy in place
All is not lost, however, and there are proactive strategies available for subcontractors to help navigate turbulent market conditions. In these situations, efficiency and cost-effectiveness are paramount and solutions that can deliver in these are worth their weight in gold.
Should a job, price or contractor not be to your choosing, you can ‘sift’ through those that match your skills. It’s also possible to decline those who aren’t willing to negotiate on price.The game aims to focus on streamlining processes, embracing technology and adopting innovative strategies – as the saying goes ‘you have to roll with the punches’ and subcontractors needn’t sit idle. So, what can subcontractors do to put their best foot forward?
What about teaming up with fellow industry players? Pooling resources is a smart way to reach more projects and take on more work. With software such as EstimateOne for example, it uses a subcontractor network to help bring expertise together.
Subcontractors can build a business profile, which showcases their services making it attractive to others. Not only does this aid better decision-making for contractors looking for the perfect match but it also encourages efficient quoting and fair market prices, while delivering closer collaboration. A great way to boost competitiveness and build long-term relationships that could consolidate future work.
Weather the storm
If the work pipeline appears to be drying up then why leave it in the hands of customers to seal your fate? Those most likely to weather the economic storm are those willing to put themselves out there. Subcontractors that build profiles create a window display of their expertise and importantly, allow them to be selective about the jobs they choose. Should a job, price or contractor not be to your choosing, you can ‘sift’ through those that match your skills. It’s also possible to decline those who aren’t willing to negotiate on price.
These hurdles are not going to vanish overnight and those that choose to adapt will be in the best position to thrive rather than survive. Staying resilient in an ever-evolving market is never an easy task but the technology and the know-how exist to make working processes easier than ever. It’s now about using the tools at your disposal and thinking about long-term solutions that can make a real difference to your business.
Simon Herod, International Lead, E1
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