Overcoming supply chain vulnerabilities

20 February 2019

From digital construction to an increase in offsite technologies, industry stakeholders must evolve how they operate and communicate across the construction supply chain. We highlight some of the consequences that arise from a failure to react to the changing nature of the supply chain.

The construction industry is in a period of intense change. Digital construction is becoming far more integrated within the traditional built environment and firms are increasingly using offsite and modular solutions to speed up project delivery.

This is compounded by the fact that supply chains are now more globalised than ever, adding further complexity to how companies operate and communicate.

These changes have brought with them some new and, at times, unexpected challenges for main contractors to consider when managing their global supply chains.

Globalised supply chain

One of the most obvious supply chain challenges is posed by the internationalisation of materials and products.

GrECo JLT’s Austria-based Construction Practice Leader, Richard Krammer, notes: “Nowadays the sourcing process has become international, particularly with specialist or sensitive parts such as tunnel boring machines, where there are only a handful of companies offering the technology.”

This limited resource availability, together with increased cost pressures, has driven some companies to seek alternative suppliers from overseas, explains Krammer.

As a consequence of this, he says, global supply chain partners must allow adequate time for the product’s shipment from overseas or risk its late delivery causing delays to other critical project phases.

Krammer notes that a further challenge is to ensure that supply chain partners communicate effectively so that sites are ready to receive the products in question.

He references a rail project in Europe where insufficient communication between sender and recipient meant that rail equipment was delivered on site before the project team had the chance to build a storage area, designed to securely hold it, due to project delays.

“It ended up being stored in the basement of a park and ride facility, which was completely inadequate for the equipment, where it was exposed to a fire and flooding.

“Due to a lack of communication, no one had foreseen that this amount of rail equipment would have to be stored in this location, at this time, introducing significant vulnerability into the project.”

Skills shortage

Elsewhere, in Australia, JLT’s Head of Construction, Iain Drennan, says supply chain vulnerabilities are driven by historic levels of construction activity, coupled with a lack of skilled workers.

“On projects, main contractors have to consider multiple suppliers for each subcontract, whether it’s pouring concrete, erecting steel frame or physical manual activity on site, because there are just not enough competent suppliers to meet demand.”

He says that issues emanating from the selection of competent suppliers are pushing up prices, with supplier selection now being a consideration for clients when assessing tender responses.

“It used to be that clients just looked at the main contractor and their credentials to deliver the project but we’re now absolutely seeing our principal/owner clients, who pay for the projects, reviewing the first and second tier of the supply chain as well.”

Growth of digital and modularisation supply chain pressure and thus vulnerability is bound to increase as digitalisation and modularisation spread throughout the construction industry.

Rob Driscoll, Deputy Director of Business Policy and Practice at the UK’s ECA, representing many small and medium-sized contractors operating in the electrotechnical and engineering services explains: “One [pressure of digitalisation] would be the speed of delivery, so if technology can speed up the pace of a project then does that put more pressure on the supply chain to deliver a compressed programme?”

In addition to time pressures, Driscoll adds that digitalisation and offsite working can place financial strain on sub-contractors during a bidding process, particularly when it comes to ensuring their software systems are compatible with the main contractors that are bidding for the same scheme.

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“If I’m a tier-two or three subcontractor and I’m being asked to tender to six main contractors for the same hospital that they’re all trying to win, but each of the six contractors uses a different version of [built environment design software such as] AutoCAD or Revit or another technology, will I have to buy all six versions?”

Driscoll says cyber security will also be a recurring concern for supply chain groups, explaining that “the smaller the organisation, the more likely it is to have a cloud-based system or have less of an understanding of cyber security issues”.

Contractual non-alignment

However, at the same time that technological advances are becoming better understood, there remains a fundamental supply chain risk that goes to the heart of every project: trust.

Contracts are, essentially, an understanding by two or more parties to carry out obligations as determined and agreed by them.

They are underpinned by a number of trust-based assumptions, two integral parts being: trust that the geographical jurisdiction governing the contract is the best to handle any potential future disputes and trust that all relevant parties have entered into the contract with the utmost good faith.

However, as Richard Krammer notes, construction industry contract models have changed little in recent years, especially in Europe, sometimes leading to both lengthy and costly disputes.

“Contractors seek to allocate risk contractually, with each party trying to push risk and disadvantage out to the other parties.

“This then leads to contractors that are under commercial pressure having to offer bid prices that are below what will return them a profit and then trying to and claim additional money when the contract commences, causing the potential for dispute. This is not beneficial to anyone.”

One example of this can be seen within a project where a piece of faulty machinery was, possibly knowingly, shipped into and used on a site due to time pressure, says Krammer.

“The machine had been damaged in the testing phase before it was transported to the construction site but, because there was a milestone to be kept, the machine was fixed inadequately and then sold and put into operation.

“Shortly after it went into operation there was a complete breakdown, resulting in a multimillion-dollar loss.

“So, it’s a question about whether supply chains are created with an alignment of interests or in conflict. In this case, one party tried to keep to its deadline, get out of the risk situation and push it onward to the next party.”

Conflict within the industry can be seen in the latest figures from Arcadis’ Global Construction Disputes Report 2018, which shows the average length and value of disputes increasing around the world during 2017.

This included a rise in the global average dispute value to $43.4 million in 2017, compared with $32.5 million the year before, and a jump in the average length of a dispute to 14.8 months, from 13.9.

Looking closer at the figures, they show that the Middle East has the highest average dispute value at $91 million, while Continental Europe has the longest average length of dispute at 18.1 months.

Interestingly, the report acknowledges the impact that supply chain and skills pressure can have on increasing the likelihood for disputes.

It says: “In an environment of labour shortages and increased pressure from expediting projects, it is often instinctive to focus on getting a project started first and dealing with the consequences later.

“Even though many owners are fully aware that taking the time to administer a sound contract and negotiating clauses and terms is best practices, the results still show that a failure to do so is an industry-wide problem.”

Corruption

Elsewhere, in Brazil, there has been a significant shift in the composition of the regional construction sector following the ‘operation car wash’ scandal.

This was a large money laundering investigation that covered allegations of corruption at the state-controlled oil company Petrobras, where executives allegedly accepted bribes in return for awarding contracts to construction firms at inflated prices.

According to a Thomson Reuters Practical Law paper, this subsequently led to the breakdown of many of Brazil’s major construction companies and an increase in activity for medium-sized construction companies and foreign players operating in the market.

The scenario raises interesting questions around how countries could work to reduce the impact that instances of corruption can have upon the wider industry supply chain.

After all, significant changes to the construction landscape, including foreign players entering the market, could pose new risks to regional markets since clients would be potentially operating within new and untested global supply chains.

Would, for example, these multinational players (with their own established international supply chain networks) continue to use local suppliers in the same manner as domestic players? And, if not, how could this impact the regional economy?

Ultimately, it would appear that marketplace fluctuations will only become more volatile as political unrest and technological advances sweep across the world.

Talk to an expert

For more information, please contact Dave Cahill, Construction Business Development Leader on +44 20 7558 3482

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