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Window of opportunity to buy contracts

Clients are successfully securing very competitive prices in the current window of opportunity. However, these price levels cannot be expected to be sustained over an extended period and they are unlikely to establish a new pricing floor. Future procurement of projects will take place in a market where prices will either be static or rising, placing greater emphasis on the risk to the contractor of future cost escalation. For projects procured in 2010, prices are being agreed and construction is being started while costs are stagnating. However deals are increasingly finalised at a point where the general market is forecast to turn. For projects procured in 2011, the expected outcome is that tender prices will rise faster as a project is being procured. The current markets turning point is difficult to predict with precision, but most downward pricing benefits are likely to have been secured.

Entry and exit prices

Given current market conditions, clients that are active in the market are making the most of this strong position and focusing on obtaining the lowest entry costs on their projects. Contractors are also more willing to accept a wider transfer of risk, through factors relating to cost, time or specification. However, whilst clients are able to secure deep discounts, this inevitably results in a greater incentive for contractors to recover additional payments on live projects. Most contracts include provision for compensation for changes, or other legal remedies. Sources of cost increase include scope change or risks that may not have been removed from the project. As a result, low entry prices rarely turn out to be low exit prices unless special measures are taken by the clients team to actively manage the outcome. Increasing the certainty of exit prices is dependent on ensuring the project can be built within the proposed budget and programme, and on minimising the opportunity for claims caused by change and information flow. For clients who successfully secure advantageous prices in the current market, investment in management processes and resources within the organisation and project team will provide further safeguards against cost and programme escalation during the construction phase. Further active considerations for management of programmes and projects include international procurement of materials and implementation of post contract change management mechanisms. Pre-contract cost planning can also be a key area for analysis and assessment of a projects commercial drivers and viability.
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