Staged Procurement to Make Comeback as Pricing Risk Bites

In the ever-evolving landscape of the construction industry, changes in procurement strategies are crucial for navigating market uncertainties. With industry experts predicting a notable return to package-based procurement models, developers are looking for ways to push forward with significant commercial projects without succumbing to the risks associated with lump sum contracts. This article delves into the reasons behind this shift, its implications for the market, and what businesses need to consider moving forward.

A clear blue sky over a construction project, showcasing ongoing development.

Understanding the Shift in Procurement Models

The construction sector has grappled with uncertainties, especially surrounding pricing risks. The insights from McBains' Summer 2025 Construction Market Report highlight an increasing shift towards innovative procurement strategies. As most organizations remain cautious about pricing fluctuations, traditional lump sum contracts are becoming less favorable. Developers are now leaning towards staged or package-based models, which allow for more flexibility and reduce exposure to risk.

These procurement models enable developers to break projects into manageable chunks rather than committing to one large contract. This flexibility could help mitigate the financial risks that were previously synonymous with hefty lump sum agreements. As Colin McCaffrey, director at McBains, noted, the current environment is challenging yet ripe for transition, leading to a forecasted rise in package-based procurement.

High angle view of construction professionals engaging in a planning meeting.

The Role of Pricing Risk in Procurement Decisions

Pricing risk has become a significant hurdle in executing large contracts efficiently. Developers are wary of market volatility that could drastically affect project costs. The expectation of a 2% increase in tender price inflation for both 2025 and 2026 further exacerbates these concerns.

Large projects often face escalating costs due to factors such as labor shortages and material price hikes. As a result, developers are looking for stability in their procurement methods. The adaptability that staged procurement offers allows these developers to adjust their contracts based on real-time pricing data and market conditions. This approach equips them to navigate uncertainties without overwhelming financial burdens.

The Rise of Co-Investment Opportunities

An emerging aspect of the construction market is the trend toward co-investment opportunities. Developers are increasingly looking to share both risks and rewards with contractors. This model not only fosters stronger partnerships but also encourages innovative solutions that benefit both parties. When risks are shared, both developers and contractors become more invested in the project's success, ensuring quality and efficiency.

These co-investment opportunities may involve splitting responsibilities, contractors may choose to self-deliver specific services, such as mechanical and electrical tasks, allowing for specialized attention and reduced risk through package procurement. By analyzing these collaborative models, organizations can align their objectives and operational efficiencies, leading to mutual growth.

Eye-level view of skilled construction workers performing tasks at a job site.

Anticipated Market Trends and Challenges

The projection of nearly £170 billion in overall market output by the end of 2025 demonstrates an optimistic outlook for the construction industry. Key sectors such as private housing, infrastructure, and industrial work are all set to experience growth. Despite these promising forecasts, challenges persist, such as planning delays, skills shortages, and rising wage costs projected to climb 19% by 2029.

The complexities surrounding labor availability and escalating expenses will require developers to adopt agile approaches. Staged procurement can serve as a buffer against these uncertainties, providing developers with the flexibility needed to react to shifting market dynamics while maintaining project momentum.

Recommendations for Adapting to Procurement Changes

As the construction industry navigates this period of transition, businesses need to proactively adapt to new procurement strategies. Here are some actionable recommendations:

1. Educate Stakeholders: It's essential for all stakeholders, from developers to contractors, to understand the benefits and mechanics of staged procurement. Workshops and training could bridge gaps in knowledge.

   
   

2. Evaluate Financial Options: Organizations should assess their financial models to determine which approach works best for them, particularly in light of rising tender price inflation.

   
   

3. Foster Partnerships: Building strong relationships with contractors through co-investment can lead to shared success. Consider creating alliance contracts that emphasize collaboration.

   
   

4. Utilize Technology: Leverage digital tools and software that enable better cost tracking and project management, aiding in making informed decisions based on real-time data.

   
   

5. Stay Informed: Regularly review market trends and analyses similar to the McBains report to stay ahead of challenges and opportunities in the procurement landscape.

   
   

The shift back to staged procurement models is not merely a temporary reaction to pricing risk but a strategic maneuver that can lead to longer-term advantages in the construction sector. Understanding and incorporating these procurement strategies could be the defining factor in successful project delivery amid a competitive and fluctuating market landscape. As always, being adaptable and informed is vital for thriving in this industry.

Close-up view of precise mechanical engineering components used in construction projects.

Navigating Forward with Confidence

As McCaffrey aptly summarized, despite the looming challenges, there is buoyancy in the medium-term outlook for the construction industry. By embracing innovative procurement strategies and fostering collaborative environments through co-investment, developers not only mitigate risks but also position themselves for sustainable growth. Understanding this evolving landscape can ensure that organizations remain competitive and ready to take on the exciting opportunities that lie ahead.

Adjusting procurement strategies can define success or failure in upcoming projects. For organizations to secure their place in the future of construction, embracing change with a proactive mindset is essential.