Procurement has gained notoriety and autonomy over the years and is now an industry in it’s own right.
G4C ask: are we doing it right?
Transactional procurement is a problem – we drive such a hard bargain that our supply chain has fragmented and can no longer afford to innovate An over-emphasis on commercial – cost is an easier and less risky way to justify your procurement decision than value, but overemphasis on cost results in a ‘race to the bottom’
What do we need to do about it?
Enabling our Supply Chain – paying fairly for the value an experienced Supply Chain can create Alignment and collaboration – collaboration by aligning all objectives with project success and involving delivery contractors in design, and designers in delivery
Nowadays construction clients are very good at getting ‘a good deal’. In fact they have huge teams of intelligent people dedicated to making sure that they get a good deal and a host of lawyers ensuring that risks are mitigated or transferred within the contract.
So we’re getting really good tender prices, tightly controlled scope and we make risks contractually someone else’s problem; we should be getting low cost, high value outputs without having to deal with any risk or uncertainty, right?
Well, not really, no.
In fact across the industry what we’re really getting is low tender prices yes, but also lots of change and conflict as the contractor tries to claw out some margin from restrictive contractual projects; risks when they occur being unmanageable resulting in delay and overspent budgets.
So what is going on?
To find out we need to look closely at three key factors: risk, quality and cost.
Risks do not disappear if they are transferred. They are usually transferred to the main contractor; can the contractor deal with the risks that they have been pressured to accept in the contract? What happens if the risks occur and they can’t afford them?
If the risks are large and they occur the contractor goes broke and the project fails; if the risks don’t occur then the contractor gets overpaid via an unspent risk allowance.
What can we do to improve our approach to risk?
|To understand this issue and possible solution let’s look at two risk management scenarios for the same hypothetical project: a client has a risk budget of £10m and 5 main contractors to deliver a portfolio of work.|
The Client transfers the risk to her MCs and gives them each £2m as contingency. During works 2 of the MCs come across risks which are £4m and £5m respectively. These 2 MCs do not have the resources to fund the risk. They struggle to deliver a very poor performance to the Client and cause disruption to the other MCs on the wider portfolio making each project cost £1m more, which they claim from the client through compensation events and allowable expenses. These other MCs pocket £2m of unused contingency. The client has to deal with huge delivery issues, desperate professionals and unbudgeted risks and ends up paying an extra £4m either supporting the unfortunate MCs or by paying huge sums of money to arbitration and conflict management services, the client also has to pay for increases to their own workforce to deal with the extra administration. The project comes in late and over budget by £7m. Two MCs are left in financial difficulty.
Cost of risks: £9m (£5m un-funded)
Unused contingency: £6m (MC’s, no impact on project budget)
Cost of conflict, additional administration and unfunded risk: £12m (covered by 2 unfortunate MCs and the Client)
The client does not transfer risk to her MCs. She retains the contingency centrally. When the two MCs discover their £4m and £5m risks she has the money to pay for them. The project ends up coming in under budget by £1m with all MCs paid fairly.
Cost of risks: £9m (£9m funded)
Unused contingency: £1m (Client’s, project comes in under budget)
Cost of conflict, additional administration and unfunded risk: £0m
QUALITY vs COST
Can we really measure quality? Can a truly high quality contractor differentiate themselves from the pack?
What if all the low quality and mediocre contractors all have decent tendering teams and everyone scores similarly on the quality tender questions?
What if the procurement decision all comes down to cost?
There has and always will be an unbreakable link between cost and quality, therefore with the quality aspect of the bid covered (everyone scored VERY well!) procurement becomes a race to the bottom, with contractors all competing to deliver the poorest service, spend the least amount of time and provide the fewest and least experienced resources to complete the job (and maintain a semblance of margin.) The only limiting factor being pride in their companies and in themselves.
SO WHAT DO WE DO ABOUT IT?
We need more performance information for procurement, we need to nurture and grow our supply chain and align our objectives with them so that we might work with them rather than against them to achieve fantastic built assets where everyone benefits from it being delivered to quality, on budget and on time.
Thankfully and quite conveniently; G4C recently ran an event in the Shard called “Collaborate: Achieve More” and we can therefore signpost you to some really informative examples and guidance (from the top experts in our industry today) which can help you to make tangible positive changes in our industry:
Constructing Excellence’s Collaborative Working: the principles
This document summarises collaborative working in a handy one page overview. It sets out 6 critical success factors for collaborative working:
Early involvementSelection by valueCommon processes and tools } BIM, continuousMeasurement of performance } improvement Long-term relationships } => leanAligned commercial arrangements
Government Construction Strategy: New models of procurement, 2014
This document outlines three modern methods of collaborative procurement:
- Two-stage open book
- Cost Led
- Integrated Project Insurance
All three of these modern procurement methods feature early supplier engagement, transparency of cost, integrated team working, collaborative working. There is a programme of trial projects on-going via CE. Results so far show that adoption of these modern procurement methods have proven to contribute considerably to cost reductions, cost certainty and better long-term value. These methods have been commended by the Chief Construction Advisor for wide adoption.
The Anglian Water @one Alliance is a collaborative organisation of consultants and contractors working together to deliver more than half of Anglian Water’s capital investment programme.
There’s even an ISO standard defining how we can work better together: ISO 44001 – Collaborative business relationship management – Framework