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Costly perils of putting price first

A culture of selecting suppliers on price hobbles relationships from the very beginning of a project. By Canute Simpson

This is a cautionary tale for those who focus solely on cost. Andrew (not his real name) is an experienced buyer for a large building contractor.

Recently, he selected a subcontractor for a documentation for a groundworks package as part of a Ł4 million refurbishment in London.

But within the first three weeks on site the contracts manager had become anxious about the subcontractor’s capability and adversarial manner.

The contractor was underperforming and was already claiming time extensions and additional costs.

Because the site was under-resourced with labour, the enabling work was slipping further behind schedule and the claims were escalating.

The contracts manager and site agent issued counter claims and had numerous meetings with the subcontractor, all to no avail. Within three months they terminated the contract.

So what had gone wrong? Andrew had selected the cheapest contractor. To make matters more difficult, he had never worked with this particular groundwork contractor before, so was dealing with an unknown entity.

Andrew’s adjudication process looked purely at the rates and cost, not at capability, methodology or the nature of the work.

The site manager and contracts manager had to invest a lot of time and effort in trying to get this contractor to perform and this was making the contract hard to manage.

Meanwhile, Andrew was distanced from events on site - and was unaware of the dire consequences of his choice of contractor.

He felt he had done his bit and it was the contracts team’s problem.

‘A great track record’

Eventually Andrew managed to get another contractor. The contractor was more expensive but had a great track record for delivery, but the outturn cost worked out to be £26,000 more than the original bid estimate.

As a result the project did not bring the expected profits. The main contractor also had to pay the client penalties for delays.

Canute Simpson is a director at Constructing Excellence in the Built Environment and leads the Business Improvement Services team

Look at the full picture – tips for getting it right

  • Fully understand the nature of the work and what your contractors have priced for.

  • Compare apples with apples. Rates and prices may reflect different perceptions of what the work entails.

  • Innovations can add value. Establish how each contractor hopes to improve project delivery.

  • Do an evaluation and get site management feedback. How well did the subcontractor perform? Build up intelligence about how easy they are to manage and feed this information back to the procurement team.

  • Measure performance using standard industry KPIs. Pay particular regard to predictability of time and cost.

  • Build long-term relationships with your suppliers. Consider negotiated contracts and a long-term framework agreement to develop certainty and commitment.

Look at the full picture – tips for getting it right

  • Fully understand the nature of the work and what your contractors have priced for.

  • Compare apples with apples. Rates and prices may reflect different perceptions of what the work entails.

  • Innovations can add value. Establish how each contractor hopes to improve project delivery.

  • Do an evaluation and get site management feedback. How well did the subcontractor perform? Build up intelligence about how easy they are to manage and feed this information back to the procurement team.

  • Measure performance using standard industry KPIs. Pay particular regard to predictability of time and cost.

  • Build long-term relationships with your suppliers. Consider negotiated contracts and a long-term framework agreement to develop certainty and commitment.