Those of us who worked through the early 1990’s recession and more recently the 2008 GFC will be very familiar with what is going to happen next in terms of construction industry procurement and delivery. Although the government subsidy has been helpful, businesses will inevitability downsize and operate in a recessionary environment (and with a recessionary mindset), for the foreseeable future.
The race to the bottom outcome sees businesses competing on price only in order to protect market position & maintain turnover, at the cost of crucial risk management. Applying a mark-up of 10% - 15% in bull market vs. 3-5% in a bear market leaves little room to deal with errors in pricing and failures in delivery but still realise a small profit.
The familiar phrase ‘they bought the project’ invokes sense of helplessness on the part of the losing bidder(s) and a realisation there will be cost pressure on the subcontractors and likely tension with the client to make the project ‘pay’. Sadly, some firms will even go out of business utilising this strategy. Seeing this outcome first hand and the stress it causes was a key driver for setting up a fully integrated design and build company with preferred relationships with sub trades and supply chain.
Let me be frank here, we support competition 100%. However, the competitive tender process needs to strike an objective risk sharing balance so all project participants benefit. What can be done? Firstly, there needs to be more collaboration between the design & build teams. Risk transfer and blame game mentality can be mitigated when you work in the same room. Secondly, tenders need to be negotiated with clients on an open book basis using a ‘2 Stage’ tender process. Cost transparency and accuracy matters for clients who rely on the up front numbers for Capex approval. And finally, sub-contractors & carpentry teams are the lifeblood of the industry, they must be financially protected and paid for their work. We therefore support a modified Construction Management form of contract and technologically integrated payment process where sub-contractors are paid directly by the client once work is complete, all with the main contractor still on risk.
Interior Design Build was set up to facilitate in house collaboration of design & build teams, we encourage our clients to negotiate contracts where possible to manage risk up front and we would welcome the opportunity to work with key industry players to change the way contracts are written and project payments are facilitated.
