Minimising construction costs with intelligent procurement approaches

Within Australia’s construction industry, the models of procurement that are typically applied do not always follow best practice. A procurement route should be selected on the unique complexities – or lack thereof – as they relate to the project, rather than based on a single, universal approach.

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There are many instances of procurement being delivered based on what has ‘gone before’, rather than an understanding of the features of local market activity, client requirements, and project specifics. Further to this, a tendency by both the public and private sectors to bypass early market consultation and engagement often results in an unrealistically short tender response period. This alone can severely impact the perceived success or failure of a construction project. Detailed analysis by Arcadis, based on projects across the UK, Europe and Australia, indicate that up 34%* of project delivery costs can be influenced by the client’s procurement strategy, meaning that there is room for improvement.

A holistic approach to construction procurement: understanding the “Commercial Thread”

A highly compartmentalised approach to the design and construction process, or a ‘paint by numbers’ approach, is one of the main challenges facing the Australian construction industry. It is problematic because the basic building blocks – consultant engagement, the design process, market engagement, contractor selection and construction – are not being viewed or structured as a single process. This observation may seem counter-intuitive, but it is the reality of how many projects are being delivered today.

Approaching each of the design, tender, and construction components separately ignores the key commercial thread that runs throughout the process and increases the chances that the project will be negatively impacted, in all likelihood, costs will be driven upwards. For example, how a project is designed will materially impact how it should be tendered, and how it is tendered will impact the agreed contract and latterly how the project is constructed. It is therefore imperative that the commercial thread is considered right from the outset and throughout each stage of the project’s delivery.

Avoiding the trends to enable a fit-for-purpose procurement route

Looking back at the procurement models that have been used over the past 20 years, it is evident that they are susceptible to trends that quickly become the widely adopted industry model – at least for a period. The mindset for embracing a new model is often driven by past failures in the market. For example, a current popular market trend in Australia is the adoption of an Early Contractor Involvement (ECI) approach. This is not necessarily a procurement route, but rather a preference for engaging with a single contractor early in the process.

Whilst there are many benefits to adopting an ECI approach, for both the contractor and the client, there can be a negative impact as it often results in increased costs through the loss of competitive tension. This may well be something that the client is willing to accept if the process is also mitigating project risks elsewhere, but this is not always the case, and clients are not typically informed of the cost premium that may be incurred by adopting this approach. Undoubtedly there is room in the market for ECI, however, it is counter-productive to see ECI as an antidote for all the ills that are prevalent in the industry.

The game changer: early engagement with the market

Crucial to the procurement and tender process of projects is the early and accurate identification of risk. Risk sharing, or at least the allocation of risk to those who are best placed to handle it, is paramount to the success of any project. Where risk allocation is perceived to be one sided or not equitable, then the tendering contractor will price accordingly. A lack of scrutiny around the projects risk profile can also lead to additional variations and delays being experienced during the construction phase. It is during this time that many of the challenges that face today’s industry occur, and many of these are a product of a weak procurement strategy and tender process.

The value of understanding, and equitably sharing, risk should not be under-estimated. There have been several significantly sized contractors recently who have announced that they will no longer be tendering for fixed-price (lump sum) contracts due to risk imbalance on mega projects. This is a common and typical scenario with major infrastructure projects, whereby they are often characterised as failures in terms of delivery and budget. The good news is that many of these challenges can be mitigated not by a drastic overhaul of the entire procurement process, but rather by focussing on improved communication between contractors and clients.

Construction procurement through the lens of human-centric communication

A critical subset of the procurement process is, and should be, communication. Ironically, such skills are all too often lacking in today’s construction industry, despite the prevalence of modern communication tools. Many project participants, as well as clients, operate in an old-world model encouraging an ‘arm’s length’ approach to the process rather than face-to-face engagement.

Engaging the market weeks or even months in advance of a formal tender process will certainly deliver both improved and realistic outcomes for all project stakeholders. Early market engagement should be strategized as to not jeopardise your commercial agenda, which could result in conflicts later in the project. Nor should you limit your discussions with a single contractor, as this may result in losing competitive tension.

This will result in increased awareness of the project well in advance of tender documentation being released, ensuring that there is buy-in from the whole supply chain, with ‘tender-ready’ contractors who are prepared to respond appropriately. Early engagement will also provide a channel to openly discuss project risk, and how this could potentially be allocated between the contracting parties.

The value in such an approach cannot be overstated as it can provide both the forum and opportunity to enable contractors to ask questions and, if required and appropriate, impart sound and realistic advice that can only benefit project outcomes in the long-term. Procurement will continue to be a central theme for controlling risks as well as improving costs. However, we should not lose sight of the fact that projects are delivered by people –regardless of their position in the process. Therefore, there is a real need to place a human-centric approach at the heart of any procurement strategy.

A common-sense approach to procurement

Ultimately, for any project to be successful it needs to have an objective approach to procurement that has been considered from start to finish. There needs to be a common theme and rationale to the projects risk profile throughout the entire process, and this needs to be reflected within the design and tender documentation as well as the final contract.  Procurement needs to be ‘joined up’ in its thinking and cognisant of the commercial thread that runs throughout the process.

Arcadis’ recommendations for a best-practice procurement strategy include:
• a properly value-managed design;
• an awareness of market conditions and the selection of suitable contractors;
• the tender process itself; and
• the allocation of risk to the party that is best placed to deal with it.

By implementing a procurement strategy that achieves ‘best buy’ from the marketplace, both clients and contractors can significantly enhance the benefits gained through the delivery of a properly value managed design.

Find out how you can create value in uncertain times through your construction costs by reading our latest International Construction Costs report 2019.


*Source: Arcadis. Analysis excludes professional fees and GST


Matthew Mackey

Director - Cost & Commercial Ask me a question
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