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Strategy needed for project procurement

Kieran Fordham
June 27, 2013

With mixed views on the outlook of the Australian construction sector and sluggish activity in recent times, it’s unsurprising that we have seen clients return to ‘lump sum’ contracting for the projects that are getting off the ground.

This shift reflects the dramatic change that took place in the UK from 2009 onwards at the start of the global financial crisis and in the face over ten years of ‘collaborative’ rhetoric post Egan’s influential Rethinking Construction report on the UK industry, commissioned by the British Government.

We are yet to see the impact of this reactionary shift in Australia, which moves design responsibility back to clients. The capacity of clients, management teams and design teams to handle this change will be tested and understandably there may be a lack of experience in the client teams. A rise in disputes is one possible outcome, but only time will tell.

Perhaps more worryingly, this almost wholesale shift away from alliance contracting highlights the construction industry’s difficulty in adopting a strategic approach to procurement; one that matches the most appropriate procurement method to the project on a case-by-case basis.

This is surprising as the efficient procurement of a construction project through the choice of the most appropriate procurement strategy has long been recognised as a major determinant of project success. Conversely, failure to select an appropriate procurement approach is often cited as a primary cause of project dissatisfaction or failure.  As an industry, why do we continually struggle to adopt a strategic and innovative approach to procurement?

The three sins of project procurement

A report by the Australian Built Environment Industry Innovation Council (BEIIC) entitled Built Environment Procurement Practice: Impediments to Innovation and Opportunities for Changes looked into Australian procurement practices and highlights the factors that lead to the inappropriate selection of procurement methods. The three biggest ‘sins’ are considered to be:

1. Poor scope management
Poor scope management is cited as a major factor and the BEIIC’s report references a survey which found that 52% of senior project professionals had been involved in a project that had not been adequately scoped by the time the project was submitted to market.

Scoping failures lead to ineffective procurement decisions and have a significant impact on project outcomes, with more than 60% of respondents stating that inadequate scope documents had resulted in a cost overrun, with more than half of those overruns costing more than 10% of the value of the project and a third more than 20%.

2. Bad habits
The report also found that project professionals rely too heavily on previous experience, typically picking procurement methods from habit, rather than considering the particular characteristics of the project and evaluating all the relevant options.

This approach stifles innovation, encourages traditional adversarial practices, and leads to poor procurement decisions, with the BEIIC’s report stating that circa 20% of projects do not use the most appropriate procurement option.

3. Lack of skills
While it has been a long-held belief that clients do not have the necessary procurement skills or expertise to adopt and execute innovative forms of procurement, we disagree.  While training to promote expertise is always of value—particularly for clients with major programs—we believe that time and organisational pressures, rather than a lack of skills, are the major contributing factors to not adopting new forms of contracts.

Indeed, it is completely understandable that clients move quickly to deliver projects according to their prior experience or in response to industry trends to meet desired organisational and personal objectives. However, in so doing, they are likely to be missing opportunities to maximise project outcomes and potentially storing up future problems that could lead to delays and cost overruns.

A strategic response

There is little debate that by taking the time to effectively define project scope and by adopting a strategic approach to procurement that effectively balances risk with project drivers, organisations can reduce transaction costs and improve outcomes. But without an accepted approach, many professionals simply do not have the resources to do just that. We propose a simple, structured and robust approach to delivering better procurement choices:

1. Define project scope
The first step is to clearly articulate the project vision and rigorously test the assumptions underlying the vision. Once this has been done, the project team needs to clearly define the project scope, risks and opportunities.

2. Conduct procurement analysis
With a clear project vision, the project now needs to be defined and decisions made on who will assume the delivery and performance risk. We recommend adopting the following robust four-step approach to procurement analysis:

  1. Understand and define the key project objectives.
  2. Identify the project complexities and constraints.
  3. Identify the key project risks and risk tolerance.
  4. Determine a procurement strategy that aligns risks and responsibilities.

3. Risk analysis
Risk analysis and management is key to successful project definition and should be an integral part of the procurement process to ensure the appropriate marriage of risk and responsibility is adopted. This step should also set the framework for the delivery of risk management throughout the course of the project and as such remain a dynamic process.

By adopting a strategic approach to procurement, organisations will overcome the three major sins of project procurement, achieve the optimal approach in the face of industry fashions, and secure the best possible project outcomes.

Kieran Fordham
Kieran Fordham is the Procurement Advice & Transaction Support Lead at Thinc. He has more than a decade of experience in the construction industry successfully managing the design and construction of significant projects for private and public sector clients, working on commercial, industrial and PPP civic projects.
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