This document summarizes a presentation given by Professor Rudi Klein on the importance of supply chain integration in the construction industry. The presentation discusses how fragmented and disconnected supply chains in UK construction lead to higher costs compared to other countries with more integrated approaches. It argues that greater collaboration and integration across the project team from early stages, including the use of project bank accounts, integrated contracts and insurance, and BIM, could help reduce costs by 33% by 2025 through improved information sharing, risk management and reduction of non-value added activities. The presentation also notes several supply chain capacity constraints and cost increases in materials like concrete, aggregates, and labor shortages in trades like facades installation.
2. 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. 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?
5. 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. 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. 7
ANSWER: CONSTRUCTION SUPPLY CHAINS
ARE DYSFUNCTIONAL
LIFTS
THEY COMPRISE SMALL DISCRETE UNITS WHICH DO NOT COME
TOGETHER AS PART OF A CHAIN.
8. 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
9. 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
10. 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. 11
COST TARGET
33% reduction in capital and whole life
costs by 2025*.
Achievable?
*based on 2009/10 government cost benchmarks
13. 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
14. 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
15. More reports and initiatives.
More official working parties/committees.
Re-inventing of wheels.
Tinkering with existing processes.
15
16. 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
17. 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
18. 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
19. 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
20. 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
21. 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
22. 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
23. 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
24. 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
25. 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
26. 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
40. 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
41. Employer Concerns - Market
• Inflation & Costs
• Legislation – Impact
• Economy
• Social Value - Inclusion
• Capacity - Shortage
• Public Procurement (OJEU) - Engagement
42. Employer Concerns - Contractor
• Price v Cost
- Difference between ‘bid and invoice’
• Quality
• Capacity
• Capability
• Direct Employment
• Social Value
• Engagement (OJEU)
• Form of Contract
• Timescales
43. 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
44. …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
45. 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
46. 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