Sourcing materials overseas: Foreign entanglements

Sourcing from emerging markets has become a buzz phrase in construction, particularly after the recent publication of a Pricewaterhouse Coopers report that concluded firms could save more than 30% by getting their materials and building components from countries with low manufacturing costs, such as China, India, eastern Europe and South America.

There is no doubt that savings are there to be had, but before you jump to the conclusion that it is an easy way to raise margins it is important to reflect on some commercial and legal issues that could arise.

The natural response might be to conclude that local materials and products might be quicker to acquire and have better quality control, but are expensive. The perception of sourcing such products from overseas is that lead times will be long, and quality and specification control poor, but they will be cheap.

However, the issues in practice are more complex. To start with, there are a number of issues that arise on the supply chain, whether for the contractor, client or specialist.

Perhaps the first and most fundamental is whether materials and products will comply with the relevant specification and legislation requirements.

This should not be an automatic assumption.

We have already heard over the past year of the difficulties created where specifications have not been complied with, for example, when unsustainable timber was used in the Scottish parliament building.

Controlling specification requirements is clearly a major issue. This requires co-operation by all those in the supply chain, and regular, vigorous testing and rechecking of specification compliance by overseas suppliers.

The easiest way of overcoming some of these problems is for those sourcing products overseas to produce detailed product specifications and place orders only with manufacturers that can commit to the relevant compliance requirements.

It is also vital to obtain manufacturers’ specification details, and these should be cross-checked with a client’s requirements.

We all remember pictures of the MSC Napoli that beached
off Devon losing more than 100 containers

This may mean longer lead-in times, which need to be factored in before committing to buying from an overseas supplier.

Then there is the issue of risk. A contractor may be sourcing materials from overseas well before it has entered into a contract. In such circumstances, it may be nervous about taking on the risks of trying to comply with a specification that it has not had a chance to review, and trusting an unknown supplier to provide the performance that it promised.

There is also a risk involved in delivery. We can all remember pictures of the MSC Napoli that beached off Devon losing more than 100 containers.

If a large retail refurbishment depended on the arrival of, for example, floor coverings from overseas, such an event would obviously have an impact on completion dates. The issue to be considered then is what damages ought to be imposed on the supply chain? It would be difficult to get a Chinese firm to pay liquidated damages in the event of non-delivery.

Similarly, if an employer has signed an agreement to procure certain materials globally prior to engaging with the contractor, is the contractor going to be happy to take the risk for the late completion of its works because of the late delivery of the components? Probably not.

Although not a legal concern, there is also clearly the commercial issue of reputation for any large client to bear in mind. In the example given, it would be damaging for a major store refurbishment to be delayed until after a key trading period such as Christmas.

All of these issues, although important, are not insurmountable because, to some extent, construction is already successfully sourcing its materials from low-cost countries. Global procurement works well when all of the parties to the process understand the issues and are willing to embrace novel procurement models in order to ensure that risks are managed by those best equipped to do so.

In conclusion, there are definite advantages to sourcing from emerging markets – just make sure you go into the deal with your eyes wide open.