Turner & Townsend Warns Against Fixed-Price Contracts

Consultancy firm Turner & Townsend (T&T) is advising clients to avoid fixed-price contracts, cautioning that such agreements pass excessive risk onto contractors and may negatively impact project outcomes. With ongoing labour shortages, high insolvency rates, and contractors becoming more selective about new work, the construction industry faces a capacity crunch that could worsen with rigid contract structures.

Fixed-Price Contracts and the Risk Burden

Fixed-price contracts, while traditionally attractive for offering cost certainty to clients, place significant financial risk on contractors, who must absorb cost fluctuations and delays. In today’s volatile environment, Turner & Townsend argues that this approach may backfire. Labour shortages are creating productivity issues and delays, and fixed-price contracts make contractors solely responsible for these unpredictable setbacks, leading to inflated bid prices to cover these risks.

Industry Trends Impacting Project Delivery

Turner & Townsend’s Autumn market intelligence report highlights the key issues at play:

• Labour Shortages: Delays and reduced productivity have become common, as the industry grapples with a limited workforce.
• Insolvencies: A high rate of insolvency in the sector is constraining capacity, impacting the availability of skilled contractors.
• Selective Bidding: Contractors are becoming more cautious, preferring to bid on projects with fairer risk allocations rather than those that could jeopardize their financial stability.

With these challenges, Turner & Townsend notes that firms willing to bid on fixed-price contracts are often those in immediate need of cash flow, potentially sacrificing project quality or reliability. Instead, the consultancy suggests considering alternative contract models that better balance risk and incentivise collaboration.

Alternatives to Fixed-Price Contracts

Turner & Townsend recommends exploring flexible contract models, such as cost-plus or target-cost contracts, which allow for adjustments in response to changing project conditions. These approaches distribute risk more equitably between clients and contractors, ensuring that both parties are incentivised to achieve project success. This can lead to more realistic bids, better alignment of interests, and ultimately more resilient project outcomes.

Key Takeaways

• Avoid Fixed-Price Contracts: These contracts place excessive risk on contractors, leading to inflated bids and potentially limiting the pool of reliable bidders.
• Consider Alternative Models: Flexible contracts, like cost-plus or target-cost, promote collaboration and fairer risk distribution.
• Industry Challenges: Labour shortages, high insolvencies, and selective bidding trends underline the need for adaptive contracting strategies.

As the construction industry navigates an evolving landscape of labour shortages and selective bidding practices, Turner & Townsend’s guidance offers a timely reminder of the importance of adaptable contract structures. By exploring alternatives to fixed-price contracts, clients can help ensure that projects are not only cost-effective but also resilient and mutually beneficial for all parties involved.