Fbe procurement event 23rd July 2015

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

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

© 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 stil l

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 skil l shortage. The availability

of labour will be fine, however, due to the amount of skil led 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 l ikely 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 over 300 social landlords and contractors

My Experience – Construction/ Valueworks

Placed over 160 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

Q & A

Government & Nonprofit

Fbe procurement event 23rd July 2015