Navigating changing market dynamics
This is an abridged article that first appeared in Building magazine, click here for the full article.
Procurement in its truest sense is finding the best supplier of goods or services that meet your business objectives combined with the optimum cost, time, and value in employing them against this remit. Over the last few decades, the built environment has developed systems that have helped us navigate this procurement process – whether in the public or private sector.
The market volatility and economic headwinds have shifted industry focus away from seeking long term outcomes to dealing with the immediacy of that uncertainty. And this uncertainty is becoming more and more apparent as seen by the shifting sands around decarbonisation policies and infrastructure commitments. This is in stark contrast with the Construction Playbook themes of earlier supply chain involvement, longer term contracting and a focus on securing outcomes from procurement.
The client ‘push’ is to longer timeframes and the market ‘pull’ is to shorter ones. Whilst contractors may recognise the benefits of such longer term contracting, the reality of market volatility and tighter margins makes the prospect fraught with risk. So, where the ‘push’ and ‘pull’ meet in the middle – at the heart of procurement – is likely to result in conflict unless new models are embraced.
There are mutual benefits for clients and contractors by moving to a programme, not project based process where earlier contract involvement is standard and the risk is borne across parties, rather than resting solely on the shoulders of the contractor or the client. It is not just contractors struggling to put the theory into practice – clients and their advisors are rightly contemplating the impact of insolvency in a market where bonding facilities are proving more challenging to source.
One tool in the procurement landscape to deal with uncertainty is far from a new one; fluctuation provisions in contracts have been around for decades. Relative stable inflation levels and the relative balance of negotiating position has let them fall out favour, leaving many in practice today without direct working knowledge of the approach. So, if clients are to consider contracts with fluctuation clauses, what are the best approaches to embracing them?
Firstly, collaborative contracting is a better starting point than the mechanics of a fluctuations clause itself. Understand what both parties are looking to achieve and create the rules for joint working to achieve them. Find a partnership where each contracting parties’ objectives are linked to the same outcomes.
Secondly, understand the data and the fit with your project. Fluctuations provisions are reliant on a data set published by a third party. The parties to a fluctuating price contract are effectively letting the data set fine tune the price paid. There are a range of data sets available including for example those from the BCIS, ONS and UK Government but each has their own nuance and niche. In complex long-term projects, we have seen the use of multiple data sets – the data scientist needs to think in a matrix.
And finally, when considering the data, provided it is managed correctly – more data generally results in better outcomes. If those in public procurement are serious about adopting the Construction Playbook, maybe there ought to be a mandatory contribution of projects to the various industry indices to better reflect the overall market.
Surely, while we work for short-term fixes for procurement of contracts being negotiated now, shouldn’t we be thinking about the longer-term solutions too?
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