Navigating the reality of a cooling market
The cooling of Germany’s construction market and the relief of the previous quarter on quarter steep price escalation that has been seen since the end of 2020, brings its own new and complex set of challenges during this pivot point in a changing market.
Developers have also been feeling the pinch in 2023, when several large project developers declared bankruptcy, further confirming that the market is in a cooling phase. Many believe that 2024 will be a time to reset, as less projects come on to the market and more contractors are available due to not having full books.
A shift in contractors’ mentalities is also being seen, with more and more contractor’s branching into new sectors – with the hope to have a better chance of securing projects. With limited contracts available, a change in mindset towards accepting risk transfer is also happening, with contractors’ becoming more willing to accept this additional risk.
While our tender price inflation forecast for 2024 is hovering just above stagnation, slowing demand has, so far, not led to the price regression many clients wish to see. Our latest market survey found that contractors still expect construction costs to rise, averaging an approximate three percent forecast for 2024.
A changing construction market leads to changing management tactics in the development of projects and programmes. Seasoned professionals take these changing market conditions and use them to their favour. In order to be successful, you need to keep your finger on the pulse of the industry and make decisions based on the current status. The following are some tried and tested strategies.
A robust procurement strategy
A procurement strategy can be a major influence on the success of a project or programme and should be planned and agreed upon from the project’s outset. Procurement impacts all aspects of a project, from design to construction, how breakdowns and schedules are structured, as well as the type of contract agreed upon.
In a cooling market, that is expected to cool further, procurement planning is even more important in order to get the best procurement results. The procurement strategy for one project is not necessarily right for another. The same can be said for market conditions. If market and supply conditions change, so should your procurement strategy.
As well as having a strong procurement strategy, ensuring the right contracts are in place to complement this strategy is just as important.
Contract management – regulation and guide
Throughout the entire construction process, whether there are changes, add-ons, or deviations, one thing remains constant, the contract. Putting a contract together takes time and effort and should not be taken lightly. The decision to enter into a specific type of contract will impact everything that follows. The contract should also complement your procurement strategy, not diminish it.
The importance of contracts does not stop at the type of contract but also includes which appendices are included. Beyond the terms of appointment, warranties, and agreements, often forgotten are the control processes that form an integral part of post-contract management for a successful project. Procedures, flow charts and timelines, from dealing with invoices, changes, or obstructions, should be integrated into the contract. The contract becomes a tool for guiding the project, enabling all stakeholders to be aware of different roles and responsibilities, necessary approvals and timelines.
A cooling market can present many opportunities for thought-through and executed projects and programmes. Setting up your project for success begins with knowing what success looks like, and a procurement strategy and contract are both crucial factors.
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