Inflating the cost of regeneration schemes

According to international property consultants EC Harris, private developers are suffering from the impact of second tier size contractors' unwillingness to take on the risk of large-scale projects.

The cost of GBPmulti-million mixed use regeneration schemes are being inflated by the lack of competition due to the small number of major contractors in the UK.

According to Peter Lakin, a leading development expert at international property consultants EC Harris, private developers are suffering from the impact of second tier size contractors' unwillingness to take on the risk of large-scale projects.

He warned that the government's strong focus towards fast track major schemes was also fuelling the problem and was putting immense pressure on the supply chain.

As Peter Lakin explained: "The regeneration of cities is being driven by increasingly complex GBPmulti-million mixed use schemes, yet there are probably only four or five contractors in the UK large enough to deliver projects of this nature which are typically GBP80 million plus".

A solution for developers is to restructure major contracts away from a guaranteed fixed price, towards a procurement model on a cost plus basis.

When done properly this provides the developer with greater transparency over costs and profits and it encourages a stronger partnership between the parties.

"Agreements structured in this way minimise the risks associated with guaranteed price contracts and provides the main contractor and sub-contractors with greater flexibility around workloads".

This works best when a contractor can see the benefits of focussing his business around selected key clients but is heavily dependent on a pipeline of developments.

"Year on year savings can also be substantial, as contracts can be structured in a way to enable developers to monitor key performance indicators, assess valuations via an open book arrangement and co-manage the project with the contractors".

"The need to set up partnering agreements on a fair and equitable basis between developers and contractors is seen as the best way forward, both in the short and long term", he added.

Peter Lakin also believes there is a lack of government appreciation around the pressure which is being put on the supply chain for developments".

The public sector's intentions for our towns and cities are highly laudable, however the lack of joined up thinking in their approach is leading to an over-heating of the market place as each city is desperate for early wins in their regeneration strategy to meet the demands of the local community.

"Developers are being put under increasing pressure when bidding for sites, in particular to sign up to ambitious timescales which is leading to higher costs and inefficiency.

Looking to the future, Peter Lakin suggests that some of the second tier contractors have the opportunity to rise to the challenge in 2007 with the incentive being increased turnover and margin".

"The inherent risks of large mixed-use projects have historically been a barrier to entry to relatively smaller contractors".

"However, the risk can be significantly reduced if the parties within the supply chain adopt a collaborative approach".

"There is every opportunity for second tier contractors to take a bigger market share and ease the pressure on the 'big boys,'" Peter Lakin concluded.

Back to top