Reaching for resilience - the route from retrenchment to recovery
The expected slowing of the market and the construction escalation pricing will bring its own new and complex set of challenges for those leading and managing capital investment projects and programmes.
The expected slowing of the market and the construction escalation pricing will bring its own new and complex set of challenges for those leading and managing capital investment projects and programmes.
Many experts believe and point out that economic contraction may finally break the expansive inflationary cycle that has followed the construction industry even before the post-pandemic surge in demand began two years ago.
But even this possibility may not fulfil the client’s hopes of a reduction of pricing and a fallback into the circumstances that occurred before this explosive inflationary cycle that began in 2021.
While our tender price inflation forecast for 2023 is around a third of the level that transpired in 2022, slowing demand has so far done little to cool construction costs. Turner & Townsend’s latest sentiment survey found that contractors still expect construction costs to rise by approximately 5-6 percent in 2023.
The continuing shortage of skilled labour, coupled with persistently high materials costs, means escalation will remain a clear and present danger in the short term. Worries about market and investment confidence, which are likely to continue, will also have an impact on the amount, complexity and size of future projects, meaning smart and forward-thinking strategies and executions can mitigate these potential challenges.
No one behaviour can neutralise the adverse effects of a slowdown. But construction is a famously volatile and resilient industry that has seen more than its fair share of rapid contractions and expansions, and this experience has taught its seasoned professionals a series of techniques that can be used to make programmes more resilient to market shocks and deviations.
Below we outline the tools and tactics that can be combined into an effective strategy for resilience, over the immediate-, medium-, and long-term.
Get the basics right (immediate term)
High input cost escalation remains the most pressing challenge to programmes in both the procurement and construction phases. While the threat of market softening and rising interest rates add an additional layer of complexity, the road to project resilience still begins with controlling costs and risk. Now, more than ever, getting the basics right and implementing structured due diligence is critical. Start by focusing on the following three key areas:
Take the time to design and tender properly
In previous years, time has been one of the key performance indicators and is always being looked at to have the schedule shortened as much as possible. Often this shortening is completed using shortened design and tender phases, to the point of overlapping these processes. This shortening and overlapping of key stages when you have the highest ability to influence your costs, ability to transfer risks, as well as getting value for money is often lost in order to gain a short period of time. This gain can often be short-lived, as the lack of proper planning and setting robust cost, schedule and design baselines extend the construction phase by often doubling or more the time that was saved in the previous phases. Adding to that a landslide of changes and a design on the go strategy, this time-saving technique is rarely successful.
Taking the time to design properly, using a design-to-cost methodology, is an absolute necessity during the design phase to be commercially viable and remain within budget. The best time to adjust a design that is over budget is before the design is completed, in the regular design discussions during the design phase, not as an additional exercise once the design phase is complete and being reviewed.
Panic plus procurement never adds up, especially in the current uncertain environment. A proper procurement plan is essential for receiving the best possible pricing and value. Too often procurement is planned because of what is considered the ‘norm’, how it has been done in the past or, worse yet, for ease of the architects or project management team. The construction procurement process is when the largest amount of the project cost is awarded and needs to be treated as such. A procurement plan needs to be well thought through, reflecting the current market and supply chain conditions, and not a ‘one size fits all’. Multiple procurement routes are often used in large projects, depending upon the current market conditions, services that are being procured, the timing of the procurement, and the level of detail known at the time of procurement, amongst various other factors. The plan should also not be fixed. If market and supply conditions change, so should your procurement plan. Procurement teams also need to take the time to eliminate any ambiguity or uncertainties prior to signing the contract, ‘road-testing’ contracts for all eventualities, building in systematic assurance mechanisms and regular performance audits.
Apportion project risk pragmatically
Client anxiety over cost volatility can make fixed (lump sum) price contracts – which transfer significant risk to the supply chain – seem attractive. However, asking suppliers to bear excessive risk can trigger other, less obvious risks, e.g., those who bid low on such ‘unfavourable’ contracts are likely to be looking to make up for the low pricing throughout construction by looking to find any changes, however small, to re-coup zero or very low-profit margins. This includes using any small changes to the schedule or deviations from what has been discussed as changes causing riffs between contractor, client and consultants which lead to delays and extra costs. Alternatively, it is possible that design discrepancies and gaps have been identified during the tender process, leading to a higher number of changes and change orders to be expected. Both situations, often represent poor value for the client, even though the initial cost looks attractive. As such, such bids should be risk-adjusted, to move towards a value-for-money decision and not a cheapest price scenario.
Keep the supply chain map updated
Sanctions on Russia, conflict in Ukraine and further political restrictions have disrupted the global supply of both raw materials and construction components, but the current shortages continually shift. Clients need to be kept updated throughout the construction phase on which parts of the critical path will be most impacted in the coming months, and procurement teams should engage with alternative suppliers early on, testing their resilience upfront and confirming their ability to deliver consistently.
Embed efficiency (medium-term)
Different construction sectors are dealing with challenges differently. Rising interest rates and falling consumer demand have prompted some private sector real estate clients to rethink their investment decisions, downsizing their current strategies and programmes, to get more for less. Other the other hand, infrastructure programmes are under pressure to deliver as quickly as possible to go into use as soon as possible, and funding is less of an issue. But if there’s one thing that links them all; greater efficiency delivers greater resilience. The following routes to efficiency are tried and tested:
Place data at the core
Establish strong digital principles right at the outset of the project. Data is one of our most powerful drivers of efficiency and needs to be recognised as an asset in its own right. It should be shared securely across programme teams and suppliers, ideally driven by a digital project management office (PMO). This is a PMO enhanced by digital tools such as powerful analytics and software robots, which enable the most efficient collection and presentation of data, gathered in real-time and available almost instantly.
At the programme level, the creation of a programme data strategy and a common data environment will enable all parties to access insights and share evidence-based best practices across projects. At the project and execution level, construction teams can use augmented reality to rehearse tasks digitally – learning exactly how to install individual elements before doing so for real, thereby eliminating errors, omissions and boosting safety.
Spend to save
Modern methods of construction (MMC) use modular components manufactured off-site that cost more initially than conventional building materials but deliver significant savings over time. In the not-too-distant past, pre-cast concrete elements were the exception and not the rule, however, that has changed due to the cost and time savings that this offers. From façade to roofing, washroom facilities to MEP (mechanical, electrical and plumbing), more and more modular solutions are coming onto the market. The savings can be easily above 10 percent in total executed elemental cost and can cut construction times by up to 25 percent or more when compared to conventional building techniques.
Factory-made modular components can be assembled to a uniformly high standard and require fewer people on-site, with working less time required to assemble. The key to using off-site production efficiently is to get the manufacturer involved early in the design process as well as collaborating well with the on-site contractors. Value, time and resilience gains will quickly be lost if on-site progress gets out of step with the production, or delivery, of modular units.
Trusted partners
As the market continues to cool, there will be a swing in the supply and demand market. This means that there will be more contractors actively looking for work when compared to recent years. This swing in supply and demand can be used to both clients’ and contractors’ advantage. Often, when running programmes and/ or multiple projects in an area or country, having a more limited competitive tender by means of pre-qualification, framework, or similar process, allows clients to go to a limited number of trusted contractors, which in turn gives more value for money as well as adding quality assurance.
Many clients believe that going out to a large competitive tender gives the best chance of getting the best price. Although this is often the case when looking at the bare tender pricing results immediately after the procurement process, this is rarely reflected when tabulating final accounts. Using trusted partners means that these partners know how you work and your expectations. This correlates to fewer change orders, and fewer delays in construction due to misconceptions and communications and delivers higher quality assurance. Using these partners adds far more value for money when looking at the big picture and causes fewer challenges and often leads to a more quickly completed project with a higher quality of work.
Consider the opportunity to reset (2024 and beyond)
With tendering conditions set to cool further in the rest of 2023, our latest forecast anticipates that tender price escalation could ease further in 2024. While it is still unclear how long reduced activity might last, the need for greater industry resilience will not end with either the easing of inflation or the return to growth. For the recovery to endure, the industry should use the coming year to boost resilience for the future too. Three long-term issues require attention:
Plan to succeed
Having a solid business case plan and long-term strategy is necessary at the best of times, but even more important in these volatile market conditions. It is extremely helpful to all programme and project stakeholders, to know where you are heading to, what long-term goals are most important and where the priorities lie.
This long-term strategy also allows for proper decision-making during the project concept phase, which mitigates many changes during the design phase, as the project has been given a sturdy and appropriate foundation, in order to begin properly.
Set-up your project for success
One of the biggest mistakes made is to run programmes and projects similarly, regardless of size, complexity and/ or duration. Every project is different and needs to be set up with this in mind. Especially important are major projects. These projects require specific set-up procedures and require a very different approach to ensure the best possible chances for success. Failure to do so has been shown to increase project challenges and difficulties throughout the project life cycle.
Following this, a proper project start is essential for project success. Trying to hit the ground running is difficult at the best of times, and next to impossible if you are thrown into the cold waters of a new project. A project start-up plan that can run either 30, 60 or even 90 days allows teams to understand the project, stakeholders and goals, set up baselines and organisational structures, and establish proper control mechanisms in order to have a game plan everyone understands.
Look beyond simple cost to deliver the greatest value
Alternative forms of procurement and contracts should be explored, with the goal being to apportion risk more equitably and pragmatically and to incentivise suppliers to maximise value rather than just hit target costs. Long lead items can often be procured early in the design process and stored for use, thus mitigating some potential delays in construction, with the supply chain challenges that are being currently seen.
Ultimately, it’s by achieving a wider definition of value – social and environmental value and measuring success – that the construction industry will become more resilient to its perennial recruitment problems. Forward-thinking clients should broaden their definition of what success looks like, including meeting net-zero or skills-building targets. Turner & Townsend has grown internationally by helping clients to always be ahead of the curve and looking forward to the future and where you, as a client, wish to be heading, as well as looking to add to the social and environmental value and success. This puts communities, value-for-money, and the climate at the heart of how programme success is judged because a construction industry that delivers social as well as economic benefit is more likely to be both an engine and a beneficiary of the recovery.
© 2023 Turner & Townsend