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Clifford Chance

Clifford Chance

Construction Insights

3 construction procurement pitfalls and how to dig yourself out of them

A poor procurement decision can be fatal to a construction project. We consider some potential procurement beartraps for project developers and suggests how they might be avoided.

1. Inexperience

Two equally experienced contracting parties, each privately recognising the other's red lines and must-haves, can generally produce a workable outcome. Problems often arise, however, when experience is unequally distributed, most often in cases where inexperienced owners are bested in the procurement process by battle-hardened contractors.

Owner inexperience can manifest itself, for example, in susceptibility to unsuitable contracting structures whose benefits are over-sold and risks understated. The drawbacks of such structures are often further obscured by the use of opaque acronyms (e.g. CLSTK and CCFT).

Many owners can of course be excused for such a lack of in-house experience as a major construction project is an unfamiliar business process for them, whereas it is everyday fare for contractors.

However, this is an avoidable problem. Owners can level up the playing field by accessing external expertise from advisers. Good advisers will not only sell support "by the hour" through an individual construction process; they will work with the owner to embed within its organisation an enhanced understanding of the construction procurement process which can be used on future projects. Our Major Project Implementation workshop is a tried and tested example of such knowledge transfer.

2. The rush of blood

Some owners cannot resist the temptation offered by a competitive bid process to impose excessive risk and/or irrationally low pricing on the winning contractor. This problem can be compounded where one or more of the bidders are outliers willing to accept significantly more risk and/or lower prices than the market norm.

In some cases, this owner behaviour is simply instinctive, and ignores the fact that the competitive tables will be reversed once the contractor is in control of the works and all its competitors have long since disappeared (or on some future project when the market cycle has moved on).

In others it is the product of rigid procurement regulation (including in-house corporate policy) which mandates low-bid selection, the use of time-served templates and/or the avoidance of negotiated price/risk trade-offs. Of course, good governance requires a degree of procurement oversight, but oversight is not the same thing as inflexibility.

A third category involves a deliberate owner calculation that the ensuing claims and other disruptions will cost the owner less than the nominal saving achieved in the upfront "low-bid" price. Such calculations are often proved wrong by events, and even where they are right in accounting terms, the resulting controlled crash is a stressful and unedifying experience for all concerned.

Of course, fault does not rest exclusively with owners. Contractors are not immune from irrational impulses. There are examples of the ordinary principles of risk pricing being ignored in pursuit of turnover and market share, with equally disastrous results.
Lastly, the rush of blood can be personal rather than corporate, with short-fused and/or incompatible individuals using the project as a personal duelling field. Any competent organisation should be capable of spotting and eliminating such behaviour, and construction contracts can certainly be drafted to assist that process via tiered dispute resolution procedures.

As with inexperience, owners can often be supported in the avoidance of these mistakes by seasoned advice. Sound management/regulatory practices based on well considered contract structures/terms and whole-life KPIs will also help.

3. Tribalism

The procurement process can reveal a tendency towards professional tribalism within the owner's team, leading to inconsistent advice from different team members, and to imperfect control and reporting. This is ironic because construction professionals generally join the industry partly because they enjoy collaborating with and learning from those in other disciplines. There is also a significant amount of cross-over expertise stored within most teams, and the value of this collective wisdom is only fully realised through respectful collaboration among professional disciplines.

Thankfully, a face to face meeting scheduled at a sociable time and location can usually dissolve these artificial boundaries.

A word about collaboration

Some commentators ascribe project failures to an adversarial culture ingrained within the industry and assert that this culture can be neutralised by the use of alternative structures which give precedence to collaboration over contractual risk allocation.

Collaboration is undeniably a powerful procurement tool, capable of benefiting any project and of being encouraged and optimised by appropriate contract language. However, it is not a magic bullet in isolation, nor is it the binary opposite of clear risk allocation. Much of the adversity in the construction sector arises not from cultural traits, but from the existence of external physical risks and divergent commercial imperatives whose clear allocation and regulation via contract terms are as essential to success as a collaborative mindset.