Shared Risk: It’s The Only Way Toward Profitability And Sustainability

Construction and infrastructure are major components of the Australian economy. Locally, according to a McKinsey report on Capital projects and Infrastructure, we spent almost $1,800 per capita alone on transport infrastructure projects in 2017, a number that will have increased over the last few years. Yet, the same report predicts a shortfall in spending on infrastructure leading up to 2030, based on anticipated population growth. Bringing forward federal and state spending, may not be enough to close the gap as we emerge from the impacts of COVID.

As we look for ways to encourage investment and a continued pipeline of infrastructure asset creation, there are significant problems with the way projects are procured and managed in Australia. Often, risk is outsourced to contractors. There are also cost or schedule overruns, almost ubiquitous according to some reports. All coupled with challenges in productivity and labour shortages.

Whilst it is tempting to break each of these issues out and try to solve them individually. They are, of course, linked. Greater transparency shared decision-making, and more accurate real-time project insights will result in better outcomes.

After decades of underinvestment in technology, there is a digital evolution sweeping the engineering and construction sector, which will facilitate these enhancements and improvements. But this also calls for a fresh approach to procurement, along with a more collaborative approach through the entire project lifecycle.

The procurement dilemma

Investments in public infrastructure account for around $43 billion in economic activity in Australia every year. Approximately half of this spend goes to the private sector, and a further 20 percent goes to professional services companies like architects, engineers, and surveyors.

Contractors are the lifeblood of the construction industry, and often contracts go out to the lowest bidder, regardless of their ability to meet site deadlines and efficiency imperatives.

The issue is that these procurement contracts are often poorly managed. In fact, it is estimated that the total price impact of poor procurement services is around 5.4 percent of total revenue obtained by professional services organisations.

This price impact is comprised of direct price increases of 3.6 percent, indirect price increases of 1.5 percent as a result of reduced competition, and finally inefficient bidding costs of around 0.3 percent.

With improvements in procurement, firms could reduce delays and increase project quality by seven percent.

All these poor procurement factors come at a price: government projects alone balloon by $239 million every year. It’s also estimated that better procurement will lower the cost of rectifications, at an annual saving of around $87 million.

The eye-watering figures don’t end there. Better procurement would lead to industry-wide potential cost-savings of $2.5 billion up until 2030 and will deliver around $5.1 billion in additional GDP up until 2030.

Greater transparency, collaboration in decision-making as projects evolve, and improved trust are essential elements to success.

Finding the root cause of procurement woes

A report from McKinsey, Beating the low-productivity trap: How to transform construction operations, found there are several key reasons for procurement woes, and the associated hit that construction companies take to their efficiency and therefore their bottom lines.

One of the main reasons for these problems is that there are shortfalls in accountability, which drives consistent failures to deliver projects on time and on budget. Organisational structures are often unclear, and no one is taking overall responsibility for results.

The report also found that there’s widespread “reinventing the wheel” and that companies often run business units and megaprojects without consistent performance management.

Finally, there’s a failure to adopt new technology, and extensive use of unsophisticated small contractors, who are also unwilling to embrace the latest technologies.

So what’s the answer? The first is to articulate a clear set of values and targets. Many engineering and project companies find it hard to estimate baselines, and that makes it hard to develop accurate plans. It’s critical to have a culture of measurement and precision.

The second step is to embrace new technology and create an integrated data system. A company needs to have a single database that shows the most important project metrics. These include construction progress and real unit costs. At the moment, many project owners, contractors and partners have their own data sets, and this is a practice that has to end.

Finally, construction companies need to adopt standardised systems and practices. To reduce procurement costs and execution times, companies should seek to ensure that all projects maximise the use of the best features from earlier projects.

Companies need an end-to-end approach that’s both cultural and operational. Making collaborative and transparent practices part of the contracting methodology and procurement criteria will bring all of this into clear focus. Organisations that do this will place themselves in a winning position.