Adapting procurement for a volatile market

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 past few decades, the built environment has developed systems that have helped us to navigate this procurement process – whether in the public or private sector. Using historic market data and trend analysis we could, in the majority of cases, predict tender prices and inflationary pressures resulting in contractors being happy in their margins and risk, and clients generally satisfied that they were getting value for money.

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. These outcomes can be as diverse as the built environment and also likely to be multi-faceted.  

While 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 the procurement of a new school may have desired outcomes of improving the educational attainment of local children while also delivering on net zero carbon pathways and improving the social value benefits to the local community.  

The client “push” is to longer timeframes and the market “pull” is to shorter ones. Those longer term client requirements may result simply from significant scale projects (as is common in infrastructure and energy projects) or from the recognition that aggregating demand into programmes may deliver mutual benefits.  

While 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. We have lessons learnt already from unprecedented times of the pandemic, and guidance including both the Construction Playbook (both for public and private sectors) and the Value Toolkit already.  

However, contextualisation of this guidance in our current markets needs to take place with consideration around tougher business environments that is resulting in contractor insolvencies and the impact of these market conditions on longer term contracts. 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. Fluctuation 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 the government, but each has its own nuance and niche. A good surveyor or procurement professional is a data scientist that can understand the data set’s limitations and constraints and how they fit with a client’s project. 

As your out-turn cost will be dependent on the future behaviour of those indices, it is important to look forward and not back. In complex long-term projects, we have seen the use of multiple data sets – the data scientist needs to think in a matrix.  

Striking the balance between contractors calling for more collaboration upstream but supporting the supply chain downstream and ensuring that risk and profit are equitable across all parts of the supply chain will be the only way we will be able to protect our industry and create the right skills and capacity

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. 

This may require a refinement of agreed pricing documents (to more traditional Bills of Quantities – whether produced by client or contractor) so detailed information could be submitted to, for example, the BCIS.

Striking the balance between contractors calling for more collaboration upstream but supporting the supply chain downstream and ensuring that risk and profit are equitable across all parts of the supply chain will be the only way we will be able to protect our industry and create the right skills and capacity. The alternative looks bleak, but with successive warnings from Latham, Egan and Farmer of the barriers of adversarial relationships and the risk of industry decline we know the change that is required. 

Surely, while we work for short-term fixes for procurement of contracts being negotiated now, should we not be thinking about the longer-term solutions too? 

Paul Beeston is partner and RLB’s head of industry and service