How best to balance value and risk in procurement

As an industry, we talk a lot about value and risk, but not always in the context of procurement. The way a construction project is set up and the manner in which it is bought are undeniably critical to its success.

The general objectives of the procurement process are to select a competent and committed full project team; to introduce each team member at the appropriate time; to secure value for money (the optimum balance between the highest standards of materials and workmanship, the shortest possible programme and the lowest possible cost) and to create incentives for the achievement of the client’s declared objectives.

How does a client best navigate this complex web of choices?

However, above all of this, value and risk are the principal focus of procurement arrangements – how value is secured and risk is disposed of. If there is a general rule, it is that the client should carry risk for no longer than they can create value by doing so. This value might be secured by getting a better building (however that may be defined) or by avoiding paying too much to offload the risk (as risk is not shed free of charge). 

It is no exaggeration to say that selecting the wrong procurement strategy can affect the final cost and programme outcome by a premium of some 10% – so how does a client best navigate this complex web of choices?

The choice of procurement arrangement will generally depend upon the risk profile of the client and the needs of the project. Risk is perceived as relating to cost and programme, and maximum risk transfer in these respects, from client to contractor, resides in the design and build option, which continues to be one of the most common routes.

There is also, though, a quality and fitness-for-purpose risk – one that impacts more heavily on users. For risk transfer to be effective, the means of governing it have to pass as well, and this means the control of design development will pass to the contractor once it has been appointed under a design and build arrangement to deliver the project.

The point at which this occurs, and the quality of project definition upon which the contract is based, are therefore critical; and it follows that quality and fitness-for-purpose risk tend to run in the opposite direction to cost-and-time risk – with a design and build option representing maximum risk to the client.

The critical nature of a completion date may not always allow time to follow the logical sequence of definition

Revisiting these issues therefore involves looking at the client’s priorities in respect of time, cost and quality and the point at which this trinity is balanced in a perception of value and the client’s attitude to risk (which may well be influenced by experience, possibly to the point of immovable prejudice, and by their decision-making structures). It would also consider the characteristics of the project (complexity versus simplicity, whether it is capable of full predefinition, the anticipated incidence of change, etc), the availability of project management, design and construction skills – generally and in the client organisation and, finally, the state of the market. 

All this also needs to be considered within the context of the programme – as the critical nature of a completion date may not always allow time to follow the logical sequence of definition, design, procurement and construction (for the whole of the project) in a way that would otherwise best protect the client against risk. These are complex issues that are often not debated for enough time, or by the right people, those who are critical to ensuring a successful strategy is implemented. The final important consideration is how to introduce the principles of partnering into the process, in the conviction that parties working together are more likely to produce the desired outcome than those in confrontation or conflict.

The keys to a successful partnering arrangement are creating an integrated team with clearly understood, shared objectives; the maximum opportunity for all involved to make a productive contribution to the development process; fair and equitable sharing of risk and reward; commitment to continuous improvement and the measurement of performance; means of resolving disputes or potential disputes that are as quick and constructive as possible and, finally, a desire to spread these principles as far as possible up and down the supply chain.

Iain Parker is a founding partner of Alinea Consulting