We rely on onerous contracts to ensure the supply chain meets the cost of a procurement process that isn’t fit for purpose. It’s about time things changed
We lawyers spend a considerable amount of time drafting or scrutinising contracts with the aim of minimising any inherent risks to our clients. Rarely do we peer over the contractual parapet to consider the procurement process.
When we do, we generally do not distinguish between the procurement and contractual processes; since they are both driven by the need to maximise risk transfer – away from our clients to someone else. This mindset has trumped the efforts made over the years to transform these processes through collaboration and partnering: concepts which have almost dropped out of the industry’s lexicon.
But the fact remains that our traditional procurement processes are unfit for purpose and it is the contracting supply chain which is having to pick up the massive bill.
Let me go from the macro to the micro. Recently I heard from one firm which had the following clause in a main contractor’s bespoke subcontract: “The subcontractor shall be deemed to have made reasonable allowance in the subcontract price for the co-ordination of all parts comprising its design and for the co-ordination of its design(s) with the design(s) prepared by or on behalf of the contractor or the employer which interfaces with the subcontractor’s design(s).”
Our traditional procurement processes are unfit for purpose and it is the contracting supply chain which is having to pick up the massive bill
This provision is fairly typical but how can one price the nonsense within it? The subcontractor will have been appointed after (sometimes long after) the consultants have carried out their design work. It will not have had any input to that work.
The dictionary definition of “co-ordinate” is to “bring the different elements [of an activity] into an “harmonious”or “efficient” relationship” (my emphasis). To achieve this the co-ordinating party should be working alongside others involved in the same activity in order to produce an outcome that is “harmonious” and “efficient”.
In other words our co-ordinating subcontractor should have been appointed early to ensure that its designs are compatible with those of the other designers. The design process is iterative. It demands that sufficient communication has taken place between all those contributing to the design to finalise the outcomes that best achieve the client’s success criteria. (BIM, by the way, is supposed to facilitate this.)
Instead we have the type of clause which I set out earlier. What does it achieve? It saddles the subcontractor with the risk (and, therefore, the cost) that the whole of the completed design will not meet the client’s needs. If the subcontractor is to price this risk, it will have to insert a contingency that could be astronomical. But it is unlikely to anticipate any complex interface issues until the elements of the inherited designs are worked through. In practice it will have to bear most of the risk if it is to stand a chance of getting the job.
If the risk materialises there is no guarantee that professional indemnity cover will come to the subcontractor’s aid; unless negligence on its part is made out. In other words the subcontractor is having to pay for the fact that those responsible for the initial procurement decisions – possibly lawyers – were slavishly adhering to a traditional procurement strategy that doesn’t enable early supply chain involvement in the design process.
The subcontractor is having to pay for the fact that those responsible for the initial procurement decisions – possibly lawyers – were slavishly adhering to a strategy that doesn’t enable early supply chain involvement in the design process
Some 17 years ago Sir John Egan in (Re-Thinking Construction) observed: “In our experience too much time and effort is spent in construction on site, trying to make designs work in practice.”
Collaboration platform Genie.com has estimated that £2bn annually is wasted on re-work – at a time when we are moaning about skills shortages. Clauses such as the one I have cited continue to embed this enormous waste which is paid for by the supply chain. Add to this figure the cost of consequential delays, disruption and disputes, and you could double your money.
In the 1990s the (then) Defence Estates Organisation’s Building Down Barriers projects achieved savings up to 69% on labour and materials costs through early supply chain involvement in planning and design. Recent research by SEC Group has revealed that over 90% of engineering contractors have never had any experience of early involvement, even on government projects.
Unless we radically change the way we procure, we will continue to rely on onerous contracts to ensure that the supply chain meets the immediate cost of a procurement process that is not fit for purpose. Over the longer-term such cost re-bounds on the industry’s clients.
Professor Klein is a barrister and CEO of the Specialist Engineering Contractors’ Group