Securing the supply chain

While market conditions ebb and flow, one current challenge for the UK construction industry is election uncertainty.

2024 is expected to see the return of a general election campaign for the first time in nearly five years and with it a host of hard-to-answer questions about how public policy will change once the current parliament ends.

With no date yet set for election day, the guesswork is already notching up. Neither of the UK’s two largest political parties has published an official manifesto, and while the opinion polls currently suggest a change of government is likely, at this stage it’s unclear what direction public sector investment in built assets, and construction policy more broadly, will take – whoever wins the keys to Number 10.

This lack of clarity may have a cooling effect on capital investment across the board, but the imponderables are greatest in the public sector.

Local authorities across the UK will be trying to work out how a Labour government might deliver on a mooted plan to support the construction of more social and affordable housing. Councils in the Midlands and Northern England will be especially keen for clarity on what might happen to the £4.7bn of government funds reallocated to them for transport infrastructure following the cancellation of the northern legs of HS2.

Question marks also linger for private sector decision-makers as the clock runs down on the current Government’s legislative agenda. For instance, a public consultation over new rules that would make it easier for residential developers to build on brownfield sites is due to close in late March, which may leave insufficient time for the changes to be implemented before the election.

The nature and number of unanswered questions will vary between subsectors, but many clients may find their greatest exposure to political risk runs through their supply chain.

With market conditions finely balanced, clients and their programme teams should use this opportunity to understand and underpin their supply chain to manage the risks posed by the current period of uncertainty.

In practical terms, this means taking four key actions:

1. Identify contractor risk early

Insolvency levels in construction continue to rise, with 4,371 construction companies in England and Wales collapsing 2023 – more than any other industrial sector. With new orders falling sharply in the final quarter of the year, many contractors now have sparse pipelines even as the tight labour market forces them to push up wages to retain and recruit staff.

Managing the risk of contractor insolvency should therefore be central to the procurement process. Procurement teams should use pre-qualification questionnaires and credit checks for both tier one and tier two contractors and give equal weight to a bidding firm’s financial stability as to its past project expertise. Procurement teams should also examine bidding firm’s current workload and whether its business is overly leveraged on one client or project that might be jeopardised by a change in Government.

For programmes that are already in flight, pre-emption is always better than cure; project controls should serve as both an early warning – and correction – system, and clients must remain vigilant for any signs of contractor distress while also supporting their supply chain.

2. Tender for the top talent

A well-run tender process will maximise interest from well-qualified, committed bidders and encourage them to bid competitively but prudently, even in the current finely balanced market.

Good tendering practice starts with a clear design, and clients should select a design team able to produce an integrated, Building Information Modelling (BIM)-enabled plan that gives bidding contractors a precise scope of work and eliminates design clashes down the line.

Remember the desire for certainty and stability runs both ways, and clients who tender smaller, well-defined packages of work with inbuilt assurance mechanisms will make themselves more attractive to the market – and thus improve the quality of both the bids they receive and of the final project outcome.

3. Get the risk right

Heightened risk, coupled with the surging input cost inflation seen since the pandemic, may tempt clients to ask the supply chain to shoulder significant risk through the use of fixed-price contracts.

However, the bids received for such contracts, which contractors often regard as unfavourable, will be risk-adjusted e.g., more expensive, and are more likely to come from struggling firms at higher insolvency risk than bids made for contracts offering a more pragmatic apportioning of risk.

With material cost inflation now easing off significantly, an attractive compromise might be for suppliers, who are more closely connected to logistics chains, to shoulder the delay risk, with the client factoring material cost contingency into its own cost planning.

Against this backdrop, a well-run two-stage procurement process could sacrifice upfront cost certainty in return for a lower, and more accurate, final cost.

4. Balancing risk, incentive and value

Clients who face the most acute post-election jeopardy (such as private schools) or a rigidly fixed budget may prioritise cost certainty above all.

But there are alternatives to the traditional fixed price contract. For instance, a guaranteed maximum price contract can be combined with a target cost agreement to give the client the reassurance of a cost cap while also incentivising the lead contractor to accept greater risk in return for the opportunity to benefit from any savings they successfully make during the delivery phase.

Such arrangements may not always achieve the very lowest cost, but they do minimise the client’s risk of cost escalation while also fostering constructive collaboration across the supply chain. In challenging times, such certainty is especially valuable.

A welcome return to ‘scheduled’ uncertainty

After a decade of successive, major shocks, UK businesses and the construction industry seem relatively unfazed by the unknowns that will come with a new Government.

Compared to the turmoil unleashed by the protracted Brexit process, a global pandemic and the outbreak of conflict in both Europe and the Middle East, 2024’s ’known unknowns’ seem mild.

While the economy remains fragile, the technical recession seen in the second half of 2023 could prove both shallow and short. With interest rates set to fall and our real estate tender price inflation forecast for 2024 standing at barely a third of the level seen in 2022, built asset investment decisions are once again being made rather than delayed.

This is a good time to go to market, provided decision-makers map and manage the impact a change of the UK’s political direction might have on both their organisation and their supply chain.

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