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Contracting Strategy

As a client, if you don’t know what you want, how are you going to select somebody who can deliver it?

The Procurement Theme Group contends that project delivery would be further enhanced by clearly aligning the contracting strategy, how we select suppliers, with the outcome required.

The construction industry delivers outcomes, intended or otherwise. The client needs to know the outcome that it is seeking and the realistic outturn cost (budget) in order to procure successfully.

The complexity of a scope of work; its risk and opportunity profile should dictate the type of company you should employ to successfully deliver it.

A fascinating angle is the pre-dominant culture in the client.

Too often the current procurement fad in a client holds sway whether it is aligned with the desired project outcome or not. The CEO espouses partnering, all deals are then partnering deals. In my opinion this led to the bad reputation of partnering in the late 90’s. People are nothing if not pragmatic. They won’t collaborate unless they understand why.

It takes time to refine the requirement and test the budget but once completed the procurement programme can be developed and equally importantly delivered by all parties.

The benefits of this are that the potential bidders have confidence in the prospective customer and the prospective project. This is reciprocated. Contractors are clear that more successful project outcomes are likely if the client is “informed”.

If this is not the case, contractors who do bid will usually increase their risk premium and threaten the outturn cost or at times of a buoyant market, decline to bid. The last is already happening.

We are also seeing many examples at the moment, of the results of bids awarded on terms not matched by the project’s complexity. This reduces the industry’s profitability or in some cases the continued existence of the firm that won the work. Other sectors cannot believe how businesses engaging in projects with the risk profile of many civil engineering jobs, can prosper on profits of 1.5% (or less).

The general rule is that the more complex a project the more collaborative the project needs to be. This means that the bidders need to be assessed and selected on their technical, commercial and behavioural capabilities. The assessment weightings will mirror this need.

The contract itself also then needs to be consistent with the contracting strategy. This means erring on the side of incentive not pain. We do all learn more from failure but enjoy and produce our best in a rewarding yet challenging environment. The client must always remember that they will have a tangible and valuable asset at the end of the project. The contractor must remain healthy to deliver again.

We are potentially seeing a split in the market, some clients adopting a full collaboration model, others seeking the benefits of collaboration without offering enough upside to the supply chain. The result is a confused and wary supply chain. In the early part of an endeavour we focus on risk until we understand and are comfortable with it. The risk is that we do not get to the opportunity part until it is too late. At this point it ceases to be an opportunity but a potential variation especially if the contractor factored the savings into its original price.

We at the CE Procurement Group believe that the Construction 2025 target of a 30% reduction in construction costs cannot be achieved without wholesale abandonment of the traditional procurement models. There is probably nothing new in the above words. We need the courage, culture and logic to continue. The evidence will soon acknowledge the success of the integrated approach to procurement.

This blog is the ninth in a series prepared by members of the Constructing Excellence Procurement Theme Group to provoke debate and seek to provide thought leadership on a crucial aspect which we see as a major barrier to improving the productivity of the sector. Comments are welcomed on the Constructing Excellence LinkedIn page or on Twitter using the hashtag #CEProcurement.

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