Background
Historically, the construction industry has suffered enormously during turbulent economic conditions. But from the outset of the pandemic the Government made it very clear that construction was one of the key industries to keep the economy moving.
The current economic climate
The industry is now flat out trying to meet demand, with consultants, contractors, trades and suppliers all trying to capture the resources they need to deliver. The labour, plant and materials are very challenging to secure reliably. There are ongoing issues such as illness, low stockpiles, and logistical uncertainties. These issues are worsened by increased prices, inability to secure standard contract conditions and problems of programme delivery.
The future challenges
The net effect is that the need for collaboration is higher than ever and makes it essential to work with trusted partners.
Standard tendering with transfer of all significant risks will not be possible. It is not that the supply-chain is taking advantage of the current climate; it is simply that they cannot manage some of the risks they face. With an abundance of work across the industry, they can afford to choose the projects and clients that are more straightforward and will not cause them any contractual difficulties.
Private sector clients have always been comfortable with negotiated contracts because their supply-chain understands the requirement of meeting the demands of an investment appraisal.
The construction industry understands the needs of particular clients and what is important to them. The negotiations may be tough, but they are underpinned by an understanding that there will be some give and take on both sides; and even these negotiations are harder under the current economic climate.
How the public sector must change to respond to the challenges
The public sector is constrained by the need to follow procurement guidelines on tendering, which are effectively having no caveats to tenders and limited or no scope for negotiation.
When the pandemic was at its peak these guidelines were relaxed and a pragmatic view was taken in order to get urgent work done. Whilst the urgent work has now reduced, the Government were accused of proceeding in haste and failing to secure arrangements for companies to deliver what they were contracted for.
Nevertheless, negotiated contracts will remain essential and the question is therefore achieving value-for-money. The public sector needs to integrate the skilled negotiator’s experience of the private sector to procure these contracts, by recruiting them. The ability to negotiate within the constraints of the business case without tendering is one of their primary skills and will ensure value-for-money is still achieved.
It is far better for all clients to debate and consider their procurement path rather than try to get back to the normal way of business pre-pandemic. Planning to negotiate does not limit your ability to get value-for-money.
If you plan to negotiate then you must have a robust business case or investment appraisal and use that to set the parameters of what you can and cannot concede.
Setting this out formally at the outset of your project with the right advisors is simply best practice for the management of a negotiation. The value and risk allocation will prove to be fair and deliverable and give a client far greater certainty of the outcomes in line with their investment.
For more information about procurement, read our management guide: Managing projects within an uncertain procurement market.