With material prices rising and build costs set to increase in 2011, Birmingham based Fusion Building Consultancy says it is seeing more companies looking at setting up their own construction arms.

The move to take on the risk of building their own projects is not just cost driven, however, says Gavin Stephens, Fusion's director, "It's about having control. There is a real concern over a second band of insolvencies hitting the industry which is denting client confidence over some construction companies longevity.

A survey by insolvency specialist Begbies Traynor reported an anticipated 10% rise in insolvencies in 2011, with the construction sectors in particular looking to feel the pinch, mainly because of a drop in public sector tenders.

Recent local insolvencies have included Coventry based GAJ Group, CPL, Connaught and Rok.

"We had one case when we got a positive credit check on a company tendering for work in early 2010 and then just 5 months later down the line they went into administration."

With increased competition, tender prices have been falling over the past three years, however, a rise of 3% in tender prices has been predicted for 2011 with the increase in input costs.

"The pressure in the marketplace for construction companies is immense.  There are fewer jobs to cost and often tender prices come in lower than expected just because companies are trying to get their foot in the door and maintain turnover. Ultimately though, these companies will suffer and the worry is they won't be able to sustain the business."

Setting up a construction arm is an option but can be more of a headache than some companies first suspect.  It's not just about managing the project and people but it's dealing with employment laws, maintaining a continuity of work and keeping all of the trades in work all of the time.

"We've had two clients, one in the leisure industry and another in retail, looking at setting up their own construction and fit-out companies in the past couple of months. Our advice in both instances has been to consider the alternative of construction management as a procurement route." Says Gavin.

"This enables clients to use the skills of the contractor to manage the construction project and spread the risk with a range of directly appointed sub contractors. The client is able to ensure prompt payment of the sub contractors invoices improving performance and potentially achieving savings"

In both scenarios there are risks and benefits that need to be fully explored before the most suitable procurement strategy is decided upon for the client.

"The best option," says Gavin is to work with tried and tested contractors who you have an established relationship with. You need to be able to have an honest and frank conversation with them about their ability to carry out the contract and contingencies in place to safeguard against insolvency.

"Yes clients do want the best possible prices to carry out work but not at any cost. It's important companies tendering can deliver projects on time and to schedule. Proving deliverability will be a key factor in 2011."