Contractor supply chains are evolving across the world. What steps do companies need to take to ensure their viability and strength?
An increase in capital expenditure across the public and private sectors in the past decade has given birth to a spate of mega projects across the world.
Major schemes such as the $5.5 billion Panama Canal Expansion, the UK’s £56 billion HS2 project and the $62 billion China-Pakistan Economic Corridor are just three schemes that are either under way or completed.
This growth, coupled with ongoing domestic projects, has ramped up demand for materials, which in turn has squeezed local supply and led to cost escalation.
Naturally, this has prompted many developers and construction firms to source services and materials else where, leading to more globalised, complex and fragmented supply chains.
Alongside this, a global shift towards offsite manufacturing and prefabrication has played a huge role in changing supply chains and traditional business models, as companies seek more efficient and simplified ways of working.
While some of these changes are exciting, all of them have a number of challenges for construction: a sector that is already struggling with large amounts of risk and financial pressure to deliver projects on time and to specification.
So, with this in mind, what exactly are the challenges attached to this shifting supply chain landscape? And how can contractors reduce their exposure to any risks ahead?
Schedules in supply chains
One of the most significant challenges for the construction industry is ensuring schemes remain on schedule, particularly when trying to manage materials and services with a number of overseas subcontractors.
As New York-based Partner Joe Charczenko of Construction Risk Partners, a JLT Group Company explains: “Thirty years ago when you were building something, by and large, all of the materials for those projects were sourced fairly locally or within a 500-mile radius of the project. Now almost every project has aspects dependent on a global supply chain.”
Charczenko says companies are having to assess a range of varying risks as a result of this supply chain shift, particularly when it comes to shipping and transporting materials through potentially dangerous territories.
“Some of the piracy issues they were having off the coast of Africa a few years back [meant that a company] legitimately had to think, ‘What would happen if the ship carrying my materials is pirated?’”
In an increasingly unstable world, where a number of countries have unique political or terrorist threats, avoiding such risks completely is an almost impossible task. This is why Charczenko believes that contractors and clients should assess a project’s challenges early on to limit their exposure.
“Certainly we focus on the riskiness of this and how you insure for these risks, but ultimately assessing where the holes in the supply chain are becomes essential to holistic risk management. It’s not just risk transfer: it is really about thinking through what the exposures are on these projects,” he says.
Some contractors are innovating in this space to reduce their risk around material origin and programme delivery, as UK-headquartered contractor Mace’s Director of Innovation, Matt Gough, explains: “The lack of UK capacity to manufacture modular parts – like bathroom pods – means that we often have to source them overseas. That can make it harder to trace the origins of some materials.”
Mace operates worldwide, including Europe, the Middle East, Africa, Asia and America, on major residential, commercial and infrastructure schemes.
Gough says: “Tracking tech – like RFID tags and QR codes – allows Mace to keep tabs on the origin of particular parts, as well as giving us oversight of where all of our kit is at any given moment.
That means fewer delays and more certainty over the actual programme.”
This proves particularly useful on some of the contractor’s London-based, large residential schemes, where there’s a high demand for the likes of bathroom pods.
In the US, clients are taking a more hands-on approach to reduce programme uncertainty – particularly on mega projects, where build deadlines are interdependent.
“On some projects, instead of depending on the typical delivery companies, clients are looking at options such as whether they should build their own concrete plant or if they should have their own trucks,” Charczenko says.
“These things are very expensive but when you are pouring as much concrete as these mega projects do, there’s kind of a variety of different ways of looking at [taking certain services in-house].
Some of it’s around productivity; some of it’s around ensuring that the product that you need is going to be delivered.”
This could also prove beneficial for clients looking to reduce their exposure to cost escalation during a project when supply becomes squeezed.
Charczenko continues: “What owners and contractors are really focused on these days is how do I control cost risk and how do I reasonably predict the areas where a supply chain could fail?”
Of course, the financial security of everyone within a supply chain is a good place to start, in regards to assessing potential failings, and should be something that tier-one contractors are on top of from the get-go – especially when it comes to ensuring the viability and strength of their supply chain to deliver on time, in full and to specification.
As JLT Senior Partner and Contractor Group Leader Mike Johnson says: “It is to a contractor’s advantage to procure trusted and solvent subcontractors since such subcontractors are more likely to have a robust insurance programme.
“If things do go wrong, you really need to have a good insurance programme behind you. It is always important to check a subcontractor’s insurance details prior to employment.”
As well as external factors, contractors and clients are also looking at internal innovations that could allow them to better manage the delivery and scheduling of their projects.
Offsite manufacturing and prefabrication is one such rising trend, which is simplifying traditional business models, cutting out unnecessary cost and having a hand in changing supply chains across the world.
Global consultant AECOM, is reportedly looking at using modular housing on its £3.5 billion regeneration of the Silvertown area of east London.
Speaking on the general benefits of offsite, the company’s Europe, Middle East, India and Africa Chief Executive, Peter Flint, says: “One of the biggest drags on productivity is a fragmented supply chain, with suboptimal integration across different services. That is one of the reasons why simplifying the supply chain is crucial.”
This simplification could also pave the way for a higher number of smaller contractors to get involved with schemes since they require less resource and management.
“As on-site construction is generally less complex, modular schemes provide an opportunity to use tier-two and three as main contractors, or even larger trade contractors, to manage procurement and oversee assembly,” explains Flint.
One of the biggest drags on productivity is a fragmented supply chain, with suboptimal integration across different services.
Peter Flint, AECOM’s Europe, Middle East, India and Africa Chief Executive JLT’s Johnson notes that offsite manufacture is a good way of lowering health and safety risks since there are fewer ‘stages and elements’ within the on-site contracting process and it can also enhance quality control because the manufacturing is in a controlled environment.
However, Flint adds that while an exciting prospect for the sector, in the EMEIA region there are challenges ahead, which need to be addressed in terms of reducing risk.
“There is still a limited supply chain, with around six sufficiently mature manufacturers able to support projects whose order books are full, and a number of offsite manufacturers are keen to enter the arena.
“The small number of manufacturers means they need to be engaged early, and design needs to be fixed before starting the production line. Changes during manufacture will be costly and could result in the contractor losing their allocated manufacturing slot.”
Clients, contractors and supply chains must be engaging early on in a programme in order to mitigate any project risks that may occur – from traditional fire safety issues to the more obscure reputational risk (see box below).
This will certainly be a challenge for a sector that is typically slow at adapting to the times. However, the sector is increasingly seeing pockets of innovation and success stories across the world, which must also be recognised and celebrated.
A tailored approach to covering reputational risk
A company lives and dies by its reputation, which is why it is vital for businesses in the construction sector to assess the potential implications of a supply chain failure at the start of a scheme.
For JLT Specialty Partner Edel Ryan, assessing such risks starts with the client. Her team has been working on a tailored solution for companies to provide cover in relation to brand and reputation damage – a tailored solution that Ryan believes differs to what is available in today’s market.
“We don’t think the insurance industry is in the strongest position to offer huge practical advice on how a business should manage its reputation; this absolutely lies with the client.
“The insurance market does, however, have the appetite to design a solution to carry the financial exposure once it understands what the risks are and what plans the client has in place to tackle those should a feared catastrophe become a reality.”
Ryan says that, after assessing their risks, it is vital for the management team to challenge the stakeholders’ capabilities of tackling any threats that may present during the project.
“Once we’ve done that, and as long as we are able to present a convincing plan to the market, facilitating the risk transfer of the identified reputational risks that meet the client’s ambitions will be possible,” Ryan says.