The recent turmoil in the markets for steel and other construction commodities just adds to the risks clients are taking by signing fixed-priced contracts.
Instead of shifting risk, the client ends up taking all the risk when the contractor fails. It is a real lose/lose situation, with the client ending up paying considerably more in the end.
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Our own CIOB survey on procurement suggests that prices 10% outside the norm need scrutiny. With the specifications of building being so heavily prescribed at the outset, material costs are roughly the same for everyone. This therefore leaves firms competing on overheads and profit margin. And if profit and overhead recovery is sacrificed, then cash flow becomes negative. If the gamble on commodity prices is wrong, then cash flow is even more negative.
When I worked in manufacturing, clients tended to take commodities — usually metals — out of the pricing mix. The supplier was left to concentrate on manufacturing efficiency under productivity and price targets, where the risk was properly shared. Customers that wanted to use steel took the risk for steel prices and we took the risks associated with manufacturing.
It was some consolation at a recent All Party Parliamentary Group for Excellence in the Built Environment
to hear Francis Maude, the minister responsible for public procurement, advocate the use of value as a measure, not lowest price.
However, we hear this every time government takes a look at procurement, but I doubt whether the public sector can ever change.
The public sector is heavily fragmented with a range of professionals, semi-professionals and amateurs involved in procurement, all looking over their shoulder at the Public Accounts Committee.
The challenges for the public sector procurer get greater as the speed of technological development increases, making their projects out-dated the minute the ink is dry on the contract. PFI was supposed to be a solution, but again, in trying to be over-prescriptive and “protect” their interests, clients lost flexibility and damaged their interests. In the end, no one feels very satisfied.
