FBE Manchester Procurement Event Supply Chain Importance

FBE Manchester
Procurement
Event 23rd July
2015

FORUM FOR THE BUILT
ENVIRONMENT PROCUREMENT
EVENT
Importance of
the Supply Chain
23 July 2015
Professor Rudi Klein
CEO, SEC Group
President, NEC Users’ Group

3
QUESTION
If the decision was left entirely to you
would you procure a building in the
way depicted in the diagram in the
next slide?

4
d
Design
team
Tier 1 contractor
Tier 2 contractor
Tier 3 contractor
Tier 4 contractor
Tier 5 contractor
Tier 6 contractor

 KPIs produced by Constructing Excellence over
decade 2000-2010 failed to show sustained
improvements in cost, predictability, productivity
and profitability.
 UK construction costs amongst the highest in EU
£
5

6
Lowest in Belgium, Germany and Scandinavia
WHY?
 Greater integration of design and construction.
 Extensive industrialisation of delivery process.
 Limited scale of sub-contracting and more harmonious
supply chains.
 Greater application of lean techniques.
 Well-paid, well-trained and highly productive workforce.
Source: EU Pilot Study Benchmarking Construction Costs in Member States by
Bernard Williams Associates (March 2006).

7
ANSWER: CONSTRUCTION SUPPLY CHAINS
ARE DYSFUNCTIONAL
LIFTS
THEY COMPRISE SMALL DISCRETE UNITS WHICH DO NOT COME
TOGETHER AS PART OF A CHAIN.

 50-70 tier 2 contractors/suppliers not uncommon.
 Typically 25% of tier 2 contracts on large projects
with a value in excess of £15m are for values
below £10,000!
 On all projects, between 50% and 75% of the
total value is accounted for by a small number of
tier 2 contractors and tier 1 contractor site
management team.
8

 But the delivery of the major tier 2 packages
is undertaken by a disaggregated tier 3 supply
chain.
 Even at the level of tier 3 contracting the work
carried out is often complex involving design,
logistics, high-tech components and systems,
coordination and integration with other trades.
SOURCE: BIS Research Paper No.145: Supply Chain Analysis
into the Construction Industry, October 2013 (research carried
out by EC Harris).
9

 High transaction costs.
 The extent of the fragmentation in the supply chain
militates against collaborative effort and waste
reduction.
 Duplication of multiple layers of profit, overhead and
risk is a major source of non-value added cost and
waste.
 High cost of managing and coordinating interfaces.
 Little scope for innovation in the supply chain.
10

11
COST TARGET
33% reduction in capital and whole life
costs by 2025*.
Achievable?
*based on 2009/10 government cost benchmarks

12
THE 4 “FLOWS”!
information flow
product flow
Cash flow
people flow
(ie teamwork)

 A supply chain should be project focussed with a full
understanding of the client’s objectives.
 A supply chain is a resource to support effective and
efficient management of the delivery process; there
needs to be channels of communication to share ideas,
options and to resolve problems.
 A supply chain plays a key role in risk management –
not risk dumping! (e.g. in addressing material
shortages, labour/skills shortages delays and price
hikes)
13

 A supply chain comprises competent firms that have
demonstrated their technical proficiencies and are
primarily selected for their ability to deliver.
 A supply chain comprises firms having a mutual
commitment to work together without recrimination to
achieve the best for project outcomes for the client.
14

 More reports and initiatives.
 More official working parties/committees.
 Re-inventing of wheels.
 Tinkering with existing processes.
15

 Implementation of existing solutions,
 to integrate the construction delivery
process,
 thereby, ensuring efficient delivery of
outcomes that consistently represent the
best value solution for the clients’ expressed
success criteria.
16

WE MUST AIM TO FULLY INTEGRATE OUR
PROCUREMENT DELIVERY PROCESSES
 Integrate the delivery team to achieve buy-in to
solutions.
 Integrate the insurance of risk to bring about a
no-blame culture.
17

 Integrate the cashflow process (i.e. PBAs).
 Integrate the contracts to achieve pro-active
risk management within the team.
 Integrate the technology through BIM with
emphasis on having a common data platform.
18

 Enables early supply chain involvement to
inform outcomes.
 Up to 80% of potential cost savings can be
achieved in the early design/planning stages;
primarily because design does not take account
of the technologies and skills in the supply
chain.
19

 Places focus on solutions that are best for the
project.
 Massively improves information flow.
 Promotes a flatter delivery process in place of
one comprising disconnected and sequential
inputs.
20

 Within the supply chain there are numerous liability
insurance policies covering the same type of risk with
the focus on establishing liability.
 Integrated project insurance (IPI) is now being trialled
as one of the model procurement routes set out in the
May 2011 Cabinet Office Construction Strategy.
 IPI is a financial loss policy that insures the cost plan
provided that it is underpinned by a robust risk
management process undertaken by the delivery
team.
21

 Project bank accounts have now gained momentum
throughout the UK.
 Environment Agency together with other
depts/agencies such as Highways England, Ministry
of Justice and DIO is using PBAs.
 PBAs promote collaboration through ensuring that
each member of the team is paid regularly from the
same “pot”.
22

 The whole team should be using the same suite of
contracts.
 If NEC is used the supply chain should be fully
engaged in the risk management mechanisms such
as contributing to the risk register and participating
in risk reduction meetings.
 The IPI procurement model is underpinned by an
Alliance Contract that embraces the key delivery
team members and provides for the governance of
the project.
23

 BIM is tailor made for project team integration through
enabling project participants to buy into design and risk
management solutions.
 At level 2 BIM the key requirement is a collaborative
data platform that allows the team to develop credible
data relating to the structure and its performance which,
then, can be handed over to the asset manager.
 But, traditional procurement and delivery processes are
impeding the use of BIM.
24

 Change has to be gradual; embedded cultures and
business models have to adapt.
 The Environment Agency has taken the lead in driving
procurement change through greater integration of the
delivery processes.
 Its use of PBAs and preparedness to trial IPI
demonstrate its commitment to achieve more efficient
outcomes from utilising the untapped potential in the
supply chain.
25

© Laing O’Rourke 2014, all rights reserved.27
SUPPLY CHAIN CAPACITY
ANDY BACON – HEAD OF PROCUREMENT: EUROPEAN HUB

CONSULTANT VIEW – ‘INFLATION’
Consultant view:
- 3-5% Inflation on tender prices
Consultant
A
Consultant
B
Consultant
C
Consultant
D
Consultant
E
Consultant
F
UK Average NORTH WEST VIEW

NORTH WEST – CAPACITY CHALLENGES
The number of construction projects underway in Manchester city centre has increased by 10% over the
past year.
Among the key findings of the study are:
• 13 schemes finished since last year
• that includes 320,000 sq ft of office space
• there were 390,000 sq ft of education and research facilities; built
• one hotel was developed in the last year
• 212 residential units were built
• and 1,457 student beds were created
• 23 schemes are currently under construction
• the number of construction projects underway is up 10%
• there were 15 new starts in the past 12 months

Trade Date Escalation (%/£) Movement Comments
Concrete Mar-15 14 / 15 : +12%
15 / 16 : + 12%
16 / 17 : + 12%.
London running at capacity for a number of years now, 12% increase in volumes
across the country.
Concrete Mar-15 14 / 15 : + 9.9%
15 / 16 : + 9.9%
16 / 17 : + 9.9%.
Concrete prices in London have risen by £9.00 / m3 in the last year
Aggregates Mar-15 14 / 15: +5-6% Due to wage inflation, increasing logistics costs due to demand, and a desire to
increase current margins, we will be looking to increase prices between 5 & 6%,
across the coming months.
Specialist mixes and complex aggregate designs are requiring a higher quality of
aggregate imported from Europe instead of the UK driving up costs.
SUPPLY CHAIN – CONCRETE AND AGGREGATES

SUPPLY CHAIN – FACADES
Facades - Aluminium Mar-15 2015 - +5% Material prices have been fairly steady for some time now despite movements within
the LME. Last quarter we were forecasting a 12 month rise of 10%, however we are now
led to believe that this will be nearer 5%.
Facades - Glass Mar-15 2015 - +5% We do see some horror figures from some of the glass producers, but they seem to
diminish and be diluted to sensible figures when in the hands of the unit
manufacturers. Again, we see a 5% rise in the cost of glass in the next 12 months.
Facades Mar-15 2015: +5% ‘The current market price is too low. The market is recovering and we will be putting 3 -
5% on prices to improve our position from a margin perspective.’ Seeing increases of
15-20% across the last 48 months on SC installation gangs.
 One of the Tier 1 Specialists will not work outside of the M25. Their view is
that there are so many opportunities available to them within the London
area, and mainly central London, that they do not need to consider
opportunities beyond this.
 Terms and Conditions are becoming more of a challenge as the specialists,
particularly the Tier 1’s, will not accept ‘back to back’ conditions with the
Main Contract.
 The requirements for mobilisation payments (between 5-10%) are becoming
increasingly requested, particularly with the Tier 1 & 2’s.

SUPPLY CHAIN – FACADES AND ENVELOPE LABOUR
Facades - Labour Mar-15 2015: +100% - Labour
escalation
12 months ago, we were was paying 100% less per m2 for Installation crews.
There is not enough capacity in the market to build out everything that is currently
being bid and in the pipeline.’
Facades - Labour Apr-15 +10-20% - Labour escalation Specialist labour costs have risen by 10% across the past year. Prices for Sub-
Contract installation gangs are increasing rapidly as demand increases. Prices here
have risen by 20% in the last year.
Facades - Labour (Hot melt) Jun-15 +100% - Labour escalation In the last 12 months, the labour rates from Hot Melt operations has increased by
100%.

Lifts and Escalators Sep-14 2014 / 15: +3-5% With increasing costs and a desire to increase profitability with the market trending
up, this is an appropriate time to increase our prices, & ties in with a company global
approach to this.
Lifts and Escalators Mar-15 2014 / 15: +5-6%
2015 / 16: +5-6%
Labour: +5%
Capacity is going to be a problem for Lifts & Escalators in the next 2/3 years. They are
being very selective in what they will price / take on.
Mitsubishi only really operate in the high end / high rise residential market. Otis are
operating around their ‘standard product’ & will not do a lot of bespoke, & Thyssen
they see are practically out of the new / install market, concentrating on maintenance
in the UK. Hence capacity issues going forward
Lifts and Escalators May-15 2014 / 15: +3% Capacity :
Starting to be a challenge, especially in design. For standard lift solutions, capacity is
not a problem, but for bespoke solutions, design resource /capacity is a challenge and
we are starting to be selective about which projects they bid where bespoke solutions
are required. In terms of labour, we are recruiting heavily, both in the UK & Europe,
and they are also increasing their apprenticeship programme quite significantly.
Lifts and Escalators May-15 2014 / 15: +3% Escalation / Inflation : Labour increases, through Union deals, are currently being
maintained at around 3%. Maintenance and / or recruitment of design / technical
staff is more of a challenge. Poaching is rife, & increases for this level of staff are
high percentages. They are currently closely managing material price inflation &
keeping it at reasonable market levels. From a margin perspective, whilst they are
looking to move margins up, there is no major push or availability to do this in the
construction market, however this is offset by the maintenance market which is still
doing well.
SUPPLY CHAIN – LIFTS AND ESCALATORS
 Capacity of the market has reduced significantly and lead in times have increased since Transport for London
signed a deal (Pan TfL) with Kone (Lifts) and Otis (Escalators) to provide all Lifts and Escalators on the
Underground, Crossrail and Northern Line extension projects.
 New lift regulations are coming into force in 2017 which are also starting to impact upon the cost of tender
values.

SUPPLY CHAIN – RESOURCE CHALLENGE
Labour - Doors & Ironmongery Sep-14 2015: +3-5% The biggest issue they see within the joinery market is a skill shortage. The availability
of labour will be fine, however, due to the amount of skilled labour leaving the
industry during the recession it means that a lot of the labour force will be
apprentices as the market begins to pick up. This will give us a different challenge in
terms of quality and productivity
Labour - Drivers Sep-14 +10% Select having to up the driver rates in the region of 10% which has been a direct
project cost, this is only going one way as the resource gets more scarce.
Drylining and Ceilings - Labour Mar-15 2014 / 15: +15%
2015 / 16: +10%
Enquiry levels are in the region of double what they were 12 months ago to an extent
where we are having to be very specific and selective in what tenders we price. We are
turning down as many as tendering opportunities as we are pricing at present.
Drylining - Labour Apr-15 2014 / 15: +10%
2015 / 16: +20%
Labour prices are now between £140 and £200 per day. The labour is very unstable
with people leaving as soon as they don’t get price work and get stuck on dayworks.
Current thoughts are huge shortages in the summer when the eastern europeans go
home for summer holidays and potential for another 10% to 20% rise in labour rates
over the next year.
Carpentry & Joinery - Labour May-15 2014 / 15: +20-35% Carpentry & Joinery – Labour rates circa £150 per day but likely to rise to £180 / £200
by end of this year.
Floor layers - Labour May-15 2014 / 15: +25% Floor layers – currently demanding £200 per day and likely to increase to £250 per
day in the summer.

SUPPLY CHAIN - SUMMARY
QUESTIONS
1. Is 3-5% the right amount to be including within our budgets / cost plans for inflation?
2. Have we factored in the impact of market opportunities?
3. Have we factored in organisational aspirations to make a profit?
4. What can we do as an industry to negate these risks?

LAING O’ROURKE – ALTERNATIVE PROCUREMENT

MOVING FORWARD…
EXTERNAL SUPPLY CHAIN
• Growth expectations tempered by market capacity
• Digital Engineering – Use BIM as a catalyst to drive value
• Are our Supply Chain ready for this?
• Collaboration with our peers on how we can achieve our Level 2 goal and beyond.
• Design and Quality – Need to refocus:
• Need our Supply Chain friends and partners to support in the delivery of zero defects.
• DfMA – Reduce labour levels and enhance quality
• Not only a LOR philosophy. We want our Supply Chain to shape this philosophy with us
• Excellent Supply Chain Relationships focused around top 300 strategic supply chain:
• 1,200nr relationship meetings per annum
• Want to become ‘Contractor of 1st choice’ with differentiated price
• Diversity: Ensuring more Women enter into the Construction industry
• Training and development
• Apprentice numbers increasing across a range of skillsets including Digital Engineering
• Graduates and Cadets – Highest ever – 175nr per annum

Procurement & Supply Chain
An Employers Perspective
July 2015

delivered over
£250m
of savings on materials and
labour
Transacted over
£1.25billion
of construction projects
Worked with over300
social landlords and contractors
My Experience – Construction/ Valueworks
Placed over160
frameworks & contracts

Employer Concerns - Market
• Inflation & Costs
• Legislation – Impact
• Economy
• Social Value - Inclusion
• Capacity - Shortage
• Public Procurement (OJEU) - Engagement

Employer Concerns - Contractor
• Price v Cost
- Difference between ‘bid and invoice’
• Quality
• Capacity
• Capability
• Direct Employment
• Social Value
• Engagement (OJEU)
• Form of Contract
• Timescales

Arriving at the right price - Tendering
• Budget/ Business Case
• Specification and Scope
• Pricing structure
• Capacity
• Capability
• Timescales
…expectation that the
‘invoice will match the bid’
Sub-Contractors
Materials
Main Contractor

…without thinking about procurement beyond that
Often with contractors:
• Less than 25% of expenditure managed by Procurement department
• User-Buyer structures – labour expenditure through QS’s
• Systems which aren’t configured properly – Poor Data
• Lack of policy, planning and process
• Lack of compliance/ control – sites doing their own thing
• Supply chain payment
• Untested markets – up to 5 years
• Contract drift and monthly ‘maintenance’ fees
• Waste and fraud
• Focus on ‘price’ and not ‘cost’…
Reduces margin…increases cost…drives variation

Not just the traditional measures…
• But how the contractors procure and manage their supply chains
• Aggregation
• Strategic relationships
• Direct procurement of materials
• ‘Price v Cost’
• Compliance - (Sites/ Requisitioners/ Product)
• Waste/ Fraud
• Process Efficiency & Effectiveness
• Administration (system based)
• Transparency - Management Information
• Cultural alignment
• Frameworks aren’t the ‘be all’
Employers - more rigorous at selection

Summary
• The Market functions in a certain way…if you don’t change then
neither will the outcome
• Employers should be more rigorous/ thoughtful at selection
• Bid costs aren’t so important…invoices are
• If contractors can’t manage their supply chain…costs will rise which
drives variation
• Be strategic
• Strive for Transparency
• Cultural alignment is important

FBE Manchester Procurement Event Supply Chain Importance

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