Strengthening tendering for a brighter future

It has been a long few weeks in politics, ending with agreement it seems and the “end of the beginning” for the process of leaving the EU. You may recall one headline featured the need (or lack of need) for impact assessments for the UK economy.

Whether the impact is positive or negative, leaving the EU will be a seminal moment for UK industry and for construction in particular as one of the sectors most sensitive to change. How the industry plans for and responds to the brave new world will be critical. Tackling some of the old problems might help the industry thrive.

It is often said that the biggest problems faced by the industry are self-made. Back in 1994 the late Sir Michael Latham identified a ‘fragmented industry’ which needed substantial changes to thrive. There has been enormous change since then but one issue which remains on the agenda (and one that lawyers see every day) is slow (or inadequate) payment through the supply chain. Even the skills shortage, which is set to get worse, is arguably contributed to by poor payment practice in the industry. 

Last month, I listened to a lively discussion at the Building Live 2017 conference where one speaker diagnosed the industry’s obsession with low margin pricing as a cause of many of its woes. It was suggested that a benefit of higher margins would be the potential to help contractors address their existing resource challenges. It would also encourage the market and improve confidence.

It is my experience that many, possibly most, clients look for the right price for a good job rather than the cheapest price come what may. Low margins are not always driven by clients. They are also shaped by those who allow themselves to cut prices to the bone and by professional advisers and procurement processes that focus too much on price over quality. So the problem is not just clients wanting more for less nor is it contractors wanting to succeed at all costs.

Inadequate pricing of projects may mean that conflict is inevitable. The client may think they have secured a good deal for a recently tendered job, whilst the contractor is thinking about how to improve margins as the job progresses. Add to that, unforeseen events (for which the contractor often accepts risk) and very quickly disputes arise. That is not good for clients or contractors.

The knock-on effect is that often, losses are recouped by penalising suppliers and contractors further down the supply chain by seeking to avoid or delay payment. Whilst the initial burden of a low price starts at the top of the chain, it often rests at the other end where it will inevitably have the most impact.

One cannot legislate for higher margins and even if you could, this would not eradicate slow or non-payment nor remedy the skills shortage. But in planning for the future, it would be worth reviewing the extent to which future procurement processes and practices can identify the best contractor for the job – not just the cheapest – and thereby promote pricing that is closer related to the outturn. This could promote greater satisfaction and stability in the industry.

Construction remains one of the UK’s leading industries. Whatever the impact on the industry of leaving the EU, this is an opportunity to plan for the long-term and how work is tendered and priced may be a good starting point.