Brian Smith, head of cost management at AECOM, discusses the evolving landscape contractors face and what’s needed to support London’s development targets
London’s housing target is just shy of 88,000 homes a year. Yet, on average, the actual number of homes delivered is much lower. Contractors in the capital report they are operating at near capacity, even as output and orders reduce. To achieve this housing target and deliver the pipeline of construction projects across all sectors, a substantial increase in capacity is needed.
Analysis from AECOM’s annual London Main Contractor report, which surveys firms with a combined turnover of £6bn, found that tier one contractors are more discerning than ever – having already filled their order books for 2025 amid a reduction in tendering and a lower-risk approach to new contracts.
And, while the big fish are adopting a quality over quantity approach that could hamper London’s development activity, there too remains the issue of labour shortages. Even once projects are greenlit, contractors surveyed don’t believe the UK is equipped with enough skilled labour to carry out the works.
Playing it safe in the new tendering landscape
The numbers tell a revealing story about how contractors are becoming increasingly selective.
AECOM’s survey saw firms report a fall in tendering activity to 60% in 2024, a noticeable decline on the 72% rate seen in 2023 and outside of the 60%-70% benchmark set for when the market isn’t experiencing major shocks.
Significant time and costs incurred when bidding for projects they have little chance of winning is what appears to be driving this cautious approach from tier one contractors. And with order books filled for 2025, many are now in the enviable position of cherry-picking projects for 2026 to 2027.
Meanwhile, tier two contractors expect 2025 to be slightly more competitive than last year, perhaps a reflection of the ongoing challenges in securing work in the residential sector.
And interestingly, alongside commercial refurbishments to provide steady work, data and infrastructure projects are becoming significant revenue streams, offering greater choice and bargaining power.
The evolution of procurement
However, perhaps the most striking shift is how differently tier one and tier two contractors are approaching procurement.
Among major contractors, single-stage procurement has all but disappeared, accounting for a mere 2% of schemes despite once being standard practice. Instead, 58% of their projects now use two-stage procurement, allowing for more collaborative planning and risk management.
Meanwhile, smaller contractors are taking a different path with single-stage procurement spiking to 51% in 2024. With residential projects stalled, these firms have been forced to compete for whatever work they can find, often accepting the higher risks of single-stage procurement.
Then there remains the next big hurdle: labour shortages. Brexit continues to cast a long shadow over construction labour following the end of Freedom of Movement. In short, the UK hasn’t successfully replaced its talent pipeline.
The result is that subcontractors now have unprecedented leverage, demanding better terms and higher rates based on the capacity available. For developers, securing reliable labour now means competing for a limited pool of skilled workers who – importantly – know their worth, and there is a need to bolster training schemes to bring new talent to the sector to create greater capacity.
At present, the slow progress of many housebuilding schemes is obscuring the scale of the issue. However, once the new gateway process for Higher-Risk Buildings is mastered, and projects receive the green light, contractors believe the UK will not have enough skilled labour in the country to carry out the works.
Despite these challenges, though, there’s reason for cautious optimism. Contractors are recognising a more stable market than in recent years and the outlook for the sector is strong as the pipeline of work remains healthy and the government commits to delivering infrastructure schemes to drive growth.
London firms are expecting inflation to run at an average of 2.9% in 2025, down from 2024 and in line with our own expectation of 2.94%.
On the labour front, the government’s plans to address shortages through new Homebuilding Skills Hubs will be a much-needed boost when it comes to closing the talent gap.
Ultimately, the contractors who will thrive in this new landscape are those embracing early engagement, risk-sharing and strategic labour planning – transforming market challenges into competitive advantages.
London’s development targets remain ambitious, but the feeling among its firms is that playing fairly and collaborating to create the best results will be the key to success.
The post Why London’s development growth depends on construction capacity appeared first on Planning, Building & Construction Today.
