Policy & Public Affairs

News & Views

Blog: Managing risk and value in the supply chain

Date: 26/05/16

Private: Ayo Allu FCIOB

When viewing the project development and construction process in its entirety, it is important to realise the origins of risk and the transgression of that risk through the process. It’s quite common for risks to gather momentum and only be dealt with during a particular phase of the process (normally the operational phase), however, that doesn’t negate the need to identify the risk and start to mitigate its potential impact.

I also consider that the selection of the supply chain during the pre-development phase can be a key risk, which can often be overlooked. The selection of consultant supply chain members who are new to a client or a working process is a point of weakness in the process and needs careful management. More work can also be done to establish the nature of past working relationships between consultant supply chain members and the subcontractor supply chain, which will undoubtedly provide a stronger foundation for the project.

One common misunderstanding, and hence a source of risk, is the conflation of Supply Chain Management and Partnering. Main Contractors and Developers generally select supply chain members on their ability to meet price and performance requirements, which provides mutually advantageous efficiency savings through developing improvements in working practices. Partnering infers an even share of risk and reward, with all partners equally responsible for ensuring the project’s success, but procurement practices tend to promote the buying and selling of project risk to the “lowest bidder”.

The selection of such contractors is predominantly based on knowledge gained through working together and will of course include an assessment of their approach to health and safety – also deemed as the key risk factor encountered within our industry.

A particular supply chain member’s ability to influence the design process as well as buildability and value engineering processes involved in the project will inherently affect their ability to reduce risk for their client.

This sliding scale regularly categorises supply chain members into tiers, (Tier 1, Tier 2 or Tier 3 – see below for definition)

Tier 1 members generally have major sway on the key issues affecting their client. Measurement, feedback and improvements in performance will serve to achieve long term improvements for end clients.
Some procurement strategies selected by clients are more appropriate for the dedicated use of Tier 1 Supply Chain members; areas of government procurement, such as ProCure21, PFI, the Prisons Framework contracts and various Prime Contracts identify the value to the end user of the dedicated use of Supply Chains, therefore excluding traditional/competitive tendering processes. It’s important to recognise that a Tier 1 supply chain member will also have an expectation to share a client’s risk profile after a certain point in the procurement process.

In other forms of contracts regularly seen in the private sector – two-stage tendering and negotiated contracts – maintaining Tier 2 supply chain members provides confidence that projects can be delivered to time and quality constraints, while also providing good value for clients. The management of risk is predominantly dealt with through the subcontractor procurement process and suitable cost allowances are made for the transfer of risk with each subcontract package procured.

On more traditional “lowest cost” competitive tenders utilising Tier 3 subcontractors, it is less likely that the use of the supply chain in its early stages will be able to demonstrate its competitiveness if judgement is made solely on lowest price.

 

By Ayo Allu FCIOB