The Power of Procurement

I had a really interesting discussion with a client over the weekend around procurement. Many procurment departments rely on cost beings a good metric of value. Particularly when appointing a main contractor for works.

In the north of England in particular many clients and procurment department are still keen to use single stage tendering. In London, it seems there is now a greater use of a two stage approach. What is not known however, is whether two stage is preferred in London because the market is busier or that cleints believe it offers better value.

This particular client I was talking to had been forced into a single stage tender from his procurement department. The projects was hugely over budget largely because the constructors had priced the risk.

A two stage and open approach would allow the risk to be clearly visable to all and to be managed and costed appropriately. The easy and expensive way is to just pass the risk to the constructor. This can be expensive in a rising market.

The clients procurment team does not wish to move from a single stage approach and therefore has limited options. The reality is the contractors can look at some cost reductions but with most of the additional cost being in risk if he wants his building as designed he is going to have to find the additional money. Whilst the procurment department will believe this provides value in reality they are paying way over the true cost.

In a retracting market clients can win when risk is priced too tightly by the contractor. However over an extended period which includes boom and recession I would suspect it balances out.

It would be far better if our industry was built on trust and a long term open book arrangement. Over several years I would anticipate that everyone would come out winning. We would however have the added benefit that with a steady profit we could all invest in continuous improvement.