Time for a grown up discussion on procurement?
Over the last twenty years we have seen a shift in the market to earlier engagement between clients and contractors and a move towards a two-stage approach.
Richard Hopper discusses the various procurement options and whether a grown-up discussion and creative thinking could provide better results.
The logic behind two-stage procurement was to bring buildability and supply chain engagement into the design process to eliminate recurring issues and stimulate ideas, whilst maximising opportunities to deliver faster overall programmes.
Whilst the economic crisis of 2008 imposed a more competitive environment on contractors, the imposition of single-stage tenders to achieve best price was not wholly successful.The improved market conditions of 2012/2013 allowed contractors to be somewhat more circumspect about the type of work they took on and the manner in which they were engaged. This led to two-stage procurement again being employed to procure a significant element of the London commercial market.
As London prices rose rapidly between 2013 and the end of 2016, many contractors failed to deliver against their Pre-Construction obligations, frequently in relation to price, but more often, in relation to risk transfer. It was not unusual for the both clients and contractors to run out of steam with the process and to part company in an increasingly more acrimonious fashion.
So where next?
The more traditional route, single stage tendering, requires a well-developed scheme progressed to a Stage 4 level of design, in order for contractors to fully understand the risks and to provide a competitive price.
It is perceived to be confrontational and somewhat analogue in a digital world. It’s also shunned by the major contracting organisations as well as a number of busy mid-size contractors.
A whole range of reasons are provided, the cost of tendering, a lack of collaboration and the inability to fully address the project risks, whether misunderstood, missed or overstated. It should also be considered that this approach is seen as less commercially advantageous than a two-stage approach.
However, our own experience is that there are an increasing number of contractors who are prepared to take on single-stage. This is in part due to poor experience of two-stage, a more considered view of risk and the simplicity or otherwise of the scheme.
Two-stage tendering, theoretically at least, gets you to the market quicker by overlapping the design and construction or design and procurement stages.
It allows appointment of a contractor prior to completion of the design and before the cost and project duration are resolved. It should also benefit from the early engagement of the contractor and the supply chain.
A Pre-Construction Services Agreement is put in place expressing the services to be performed by the contractor. However, all too often this period boils down to compilation of a contract sum and an unedifying attempt to de-risk the project for the contractor.
The commercial response at the first stage is relatively limited, with consideration given to the preliminaries plus the level of overheads and profit. Designs are developed in conjunction with the contractor and his chosen supply chain and as far as is possible, competitive prices are sought. It is always questionable just how much competition really exists and the movement of ‘as tendered’ costs to final bid pricing, is a truly imaginative skill.
We should not lose sight of the importance of delivery to the market in a timely fashion, with any number of client bodies accepting that two-stage should yield a more advantageous programme. However, does this really translate to commitment to a completion date and does the cost premium really translate into value for the client? In practice, the second stage of two-stage can become a procurement exercise with little value added or emphasis on ideas, innovation and buildability.
One established alternative with a chequered history is the construction management route.
This is where the client enters into a series of direct contracts with all the sub-contractors (trade or works contractors) directly, rather than through a main contractor who employs sub-contractors. The client would also appoint a construction manager to manage the procurement and construction process.
Hailed by some as the panacea, construction management has lain dormant for some considerable period, but, in a limited fashion is stirring again. Clients increasingly want to engage with the supply chain, whether it’s the cladding contractors, ground and frame contractors or the M&E sub-contractors. This even extends to the point of developing close working relationships on the supply of equipment or light fittings. This would naturally lead to a more hands on approach to construction and the potential to engage with construction management as a solution.
Of course it is not quite that simple. The client will now hold all the risk and is responsible for everything in relation to managing those contracts, payments and so on, which requires a level of expertise and resource that many do not possess.
It is quite often employed in what is referred to as ‘project recovery’ where construction managers are asked to step in to address problem jobs or failed two-stage projects. Whether it will be employed more widely is open to debate, not least because the approach requires the construction manager to act as a consultant rather than a builder, which is a different skill set.
What makes good projects?
We are educated to understand that procurement is about trying to balance the requirements of time, cost, quality and risk.
However, we would be hard pressed to find a client who believes that a project has been a success because they got the cheapest price or the fastest programme or paid a premium for perceived risk.
We need to recognise, at least before the deployment of robots in any meaningful way, that successful projects are delivered by people and how people on the clients’, consultants’ and contractors’ side interact to create a successful team.
Leadership within all disciplines, whether from the client in respect of a clear brief and view of what is required; the designers, in respect of a well-considered scheme that delivers the correct level of value; and from the top in contracting organisations.
Too often there is lack of experience or leadership evident and frankly the key individual at a contractor needs to be a leader.
Where does innovation come from or is construction merely a service of delivery?
Real innovation is borne of being challenged to address or improve the way in which a product or service is delivered. How do we create the opportunity to innovate in construction when there is little incentive to improve our working practices or to consider alternatives that benefit all parties? Too often buildability advice concentrates on highlighting issues, rather than solving them. Whilst we fully understand the need to manage risk and to try and eliminate it as far as possible, innovation should lead to smarter ways of doing things that are cost effective and that support the design intent.
How do we learn the lesson from previous projects?
It is rare to see an organisation’s or an individual’s experience used to create stronger teams, capable of the challenges that exist in a high pressure/high risk working environment.
Company and individual CVs are rarely examined or challenged and all too often mismatched teams are proposed and accepted.
Trust is hugely important and a lot of the issues that arise surround a lack of trust or broken trust between the parties.
Years of baggage leads to brinkmanship as people look to manipulate the market when it’s in their favour, rather than reading and supporting it. We are all to blame. Designers are perceived to focus on product at the expense of practicality; cost consultants are perceived to be defensive of their position and focused solely on cost; and contractors of working for their own rather than the collective good.
It is worth remembering that the risks associated with complex central London projects can be high and a return of 4-5% of stated overhead and profit is not really sufficient reward for the imposition of such risk. We still seem to operate in a high volume, low margin market and maybe this also needs to change to improve transparency and communication.
Supply Chain Engagement
We seem to forget that main contractors rarely build and that it is the supply chain and sub-contractors who play a key role in the success or otherwise of a project.
How do we collectively agree who should be on a tender list and still create the circumstances where they are prepared to provide the correct level of resource to a scheme?
Breaking the cycle
Inevitably a cycle emerges between single-stage and two-stage When there’s limited work around, clients will invariably look for the most competitive price.
Conversely when there’s lots of work, contractors will pick and choose the work they take on.
They will often only undertake a two-stage approach, with price escalation laid at the door of the supply chain. Neither route provides a fail-safe approach and increases to budget, project duration and risk continue to be an issue.
So why not negotiate with your friends when times are tough and insist on more competition when the market is busy?
Damage limitation / Getting it right first time
If selecting the right contractor is key to project success, changing an under-performing contractor can be a huge problem for a project.
It’s a very public process and the reputation of the project and those involved is at stake. Clients can be pushed too far in terms of attitude, approach to risk and approach to cost. We are aware of schemes that have stalled for 6-8 months due to a change in contractor and whilst it can be frustrating, it can often be the right decision.
The current market cycle has probably experienced the highest level of contractor replacement that we have seen in recent memory and whilst it is important that this sanction should exist, we have all failed if it needs to be employed.
Selecting the right route
There’s no single answer. All are appropriate dependent on the circumstances.
When selecting the route it shouldn’t be dictated by the market; it should be dictated by the clients’ aspirations for the project, the client’s attitude to risk and the client’s aspirations for time.
It also needs to be properly balanced by the offer, in respect of the people, the leadership, how innovation can be employed, how experience is really brought to bear, how we can rebuild trust and how we engage with the supply chain.
The truth is, every approach has its benefits and weaknesses and the industry continues to learn and develop, taking the best from each and trying to mitigate the worst aspects.
If pushed, our preference is competition; to keep people honest, followed by that grown-up discussion regarding the correct level of return and commitment to the right people. It also needs a more considered approach to supply chain engagement, which may change from contractor preferred to client preferred, and a properly shared understanding of risk and reward.