News & Views

Recognising the Supply Chain

At the risk of stating the obvious, there are presently a number of problems, all acting together to break the construction business model. Perhaps the biggest issue is “the lowest cost wins” approach, with clients and project owners all wanting to maximise their own profits to the extent that they ruthlessly seek out the cheapest option. As a result, main contractors are having to cut their own margins to the bone, and if rumour is to be believed, some are even buying work at cost price, and then seeking to recover their margin from the supply chain or from clients with aggressive commercial strategies.

Of course, this has quite a knock-on effect, putting immense pressure on the supply chain to work on increasingly slim and fragile margins, with only one outcome – a race to the bottom with their own costs. No account of value added in a collaborative process but more an approach of taking all the good advice and assistance from one friendly subcontractor and then hawking these round the market place to get the cheapest price. This is not going to drive forward innovation and collaborative working – surely it just drives the same behaviour of cutting costs, increasing risks and leading to larger more frequent disputes.

In this environment ensuring fair payment terms becomes even more important and there are some recent poor examples in relation to this. Carillion, for example, paid on 120-day terms, unless you chose to use their early payment scheme – a scheme which meant you paid them the interest on monies they would have earned on the cash, and in return they took out a loan on your behalf, which they committed to repay. It has been suggested that when Carillion collapsed banks started to recover the money from sub-contractors, who were unaware they had effectively taken out a loan!

On top of this there is that constant construction irritation of retentions, which clients often charge on the main contractors to supposedly ensure the building is error free. This charge is then passed on down the supply chain so that the main contractor can manage their own cashflow and benefit from the interest they receive from holding on to other people’s money.

The Federation of Piling Specialists (FPS) considers that retention should be done away with as too often it is simply used as an excuse to delay payments for years, financing the main contractor, or ultimate client, often to disastrous effect when one of them gets into financial difficulty. Whilst the FPS members have been successful in largely removing retention from its sector of the industry they do encounter the same problem with the under certification of the work they’ve done on site – basically FPS members get underpaid on time and then follows a fight to get the full value of the job that’s owed.

Overall this means that quality is not being valued in the supply-chain as the pressure is to cut cost, cut corners and do things as cheaply as possible. This then leads to problems with the construction that result in legal claims and we all know where that ends.

What BuildUK wants and is fully supported by the FPS is for customers to pay for quality, invest in it and realise that it will deliver value and reduce the risk in the project. Specifically, the FPS would like to see safety, quality and innovation evaluated in the tender process and not just price. This mean a cultural shift has to take place where clients and specialist contractors engage and collaborate early in a project scheme, so that there is the time to study potential value engineering opportunities and all parties fully understand the risks and have the time to plan in order that optimum solutions can be developed and delivered.

It almost goes without mention that the FPS, like Build UK, is proposing that everyone is paid on time and fairly. Liabilities should also be capped with risks shared appropriately.

When you step back and look at the issues they should not be so hard to remedy. In reality, all anyone wants, no matter where they exist in the supply chain, is to be valued, respected, and not commoditised where the only outcome is a working relationship full of distrust and resentment with no real winners.