Three of the top procurement challenges facing UK construction

Unfortunately, the process of sourcing, acquiring and paying for goods has recently been beset with problems, with global factors such as the pandemic, Brexit and the Russia-Ukraine war all contributing factors.

In this article, we will consider the top 3 procurement challenges facing the UK construction industry, their origins, and how parties can seek to mitigate them. 

Custom formalities & global sanctions

Following Brexit, we are seeing a general reluctance of suppliers to supply into the UK on a Delivered Duty Paid basis (i.e. the seller delivering goods at their own expense and risk), principally because they are not yet set up to deal with the UK customs formalities and, more importantly, there are uncertainties as regards their ability to recover import VAT even if they own the goods at the point of import (unless they have an established UK presence). This has led to negotiations as to how risks arising from import and customs regulations should be allocated and mitigated.

Internationally speaking, global sanctions that different jurisdictions have introduced in response to the Ukraine War have also caused disruptions to supply chains.  The need to consider the application of different sanctions regimes (and the differences between them), and their business impact, have created uncertainties on the extent to which businesses may continue to procure products and technology from their suppliers across Asia, Europe, the Middle East and the US, leading to unpredictable lead times and increased costs.

Global businesses (both on the demand and supply sides) are having to react to and overcome these challenges. Practically, we are advising our clients to enhance supply chain visibility and to de-risk supply chains, for example by reconsidering and/or diversifying their sources of goods and materials. Suppliers are also having to actively enhance their internal controls and management of their upstream suppliers, in order to satisfy the demands of not just their customers but also bankers, which in some cases can be a steep learning curve.

Our sanctions team have prepared more detailed information on global sanctions and their impact here.

Taking these proactive steps to reduce supply risk will require investments, and the associated costs are often passed on to employers, which in turn will push up construction costs.

To combat these issues, parties to supply and construction contracts need to collaborate, assess relevant risks and consider alternatives together to avoid overdependence on a particular supplier that create exposure from a sanctions perspective. Employers must also look for ways to protect themselves, including ensuring they have the ability to terminate the contract at will if the supply agreement becomes commercially unreasonable.

Inflation

Geopolitical events also have a profound impact on inflation. Construction projects rely on imported materials and, as inflation rises, the prices of these materials also rise.

Traditionally employers had the benefit of a fixed price contract and contractors bore the risk of inflation, but in the current economic climate, contractors are artificially increasing their prices in order to address this risk or holding bid prices for short periods of time.  

Strategies can be adopted by employers to help pro-actively address inflation risk such as: including fluctuation provisions (see article: Fluctuation provision could help hedge against inflation); value engineering, to help identify and eliminate any unnecessary or wasteful elements; and, working collaboratively with contractors to source alternative supplies.

Market volatility has also made securing materials more difficult as well as more expensive. There is increased pressure on employers to pay for materials in advance, in order to secure their availability and price.  

To avoid supply chain insolvency putting these advanced payments at risk, it is advisable that employers take certain steps, such as including additional contractual protections (e.g. storing goods separately and marking them to order, retention of title clauses etc.); procuring a vesting certificate and/or by procuring an advance payment bond.

Labour shortages

The impact of Brexit and changes to working practices following COVID-19 means a shortage of available labour able to work in the UK.

Contractors may face increased labour costs due to the reduced availability of workers and the need to offer higher wages or incentives to attract and retain staff, affecting cash flow and solvency. 

This has resulted in overseas contractors being reluctant to take on any obligations that would require them to perform any on-site services in the UK, including the rectification of defective work. It can actually be more cost effective for the defective goods to be transported back to the suppliers for rectification at their facilities and then transported back again and/or replaced; and for maintenance services to be provided remotely. 

It is therefore worth the parties considering such alternative options (even if it is clear cut as to who bears the risk contractually), in order to resolve these issues and allow the parties to focus on the ultimate goal of a successfully completed project.  

Conclusion 

The impact of global events and on procurement in the UK construction market cannot be underestimated.  With the forthcoming election in the US, and potential further market volatility, the position is unlikely to improve soon.

International suppliers will continue to have to be agile, and will need to take steps to make their supply chains robust, which will be challenging and may also push up prices, but will help future-proof their businesses.

It is paramount that employers put in place strategic and considered procurement strategies to ensure they are aligned with market conditions and risks, providing sufficient flexibility and protection for unforeseen events.