It is often said that a construction site is a very dangerous place to work. Innovation and improvements, in best practice, have been the key to improving health and safety on site.
If we can innovate so successfully in this area of the business, why then do we not pay the same attention to other forms of risks within our business?
In this post, Access Coins supply chain expert, David Bullock, explores how to mitigate risk across construction supply chains, and how Coins’ Supply Chain Risk Management Software can do this.
Is Your Supply Chain Your Biggest Risk?
For many construction industry contractors their supply chain partners are their biggest asset as well as their biggest risk. As stated by Andy Chisholm, Construction Risk Engineer at Zurich Risk Engineering UK, “Fundamentally, a main contractor will live or die by the success of their subcontractors” (Zurich, 2014).
The use of subcontractors enables the main contractor to undertake more complex projects whilst not unacceptably increasing their risk. However, concerns have been expressed about the prevalence of subcontractors today.
The concerns stem from a perception that the main contractor has less control over the skills and training of subcontractor employees and so there may be a negative impact on quality and health and safety on site.
Increasingly, subcontractors will themselves also subcontract elements of their package of works to other suppliers.
This has resulted in the development of complex supply chains, with different tiers of suppliers, some of whom may be entirely unknown to the original client.
On large or complex projects, responsibility and performance generally cascades down the supply chain to a plethora of suppliers. The first and second tier of the supply chain may sign up to fairly onerous agreements but as the chain develops, so the contractual liabilities decrease until suppliers at the end of the chain are often not locked in at all.
Subcontractor insolvency is the single biggest cause of default according to industry insurance company Zurich, stating that “53% of defaults are caused by insolvency” (Zurich, Managing Subcontractor Risk in 2012).
Failing subcontractors therefore have a knock-on effect to ongoing projects, causing delays, which in turn leads to additional costs as the subcontractor is replaced, increased costs, reduced margins and perhaps even penalties.
Uninsured, unaccredited subcontractors pose a huge risk to the industry by exposing businesses to increased liabilities and possible legal ramifications in the event of a failure, be that financial, environmental, product or safety.
A failing supply chain will ultimately lead to delays, cancellations, disputes and have a negative impact on the project timetable and costs, leading to disputes between you and your end-client. It may also damage your reputation within the construction sector.
However there are ways to spot the warning signs within your supply chain early. Some of the most common factors of a risky supply chain include:
- Difficulty processing contract documents; providing timely, accurate and complete submittals
- Increased levels of change orders
- Frequent and unanticipated supplier turnover
- Fluctuating workforce size and morale without a scope-related cause; frequent management and labour resource issues
- Strained turnover ratios (payables and receivables)
- Reduced lines of credit
For more guidance, take a look at the following areas of your supply chain to identify potential risks:
Financial
Obtain timely, audited financial statements from subcontractors, or via known credit agencies. Then using standard metrics, evaluate potential subcontractors according to your own defined risk criteria. Pay particular attention to a subcontractors’ cash position, without cash one slow-paying client or main contractor on another job can cause a subcontractor to struggle.
Experience
Does the subcontractor have experience with projects of a similar size and scope? Pay particular attention to subcontractors that offer multiple services. Can they demonstrate their capability across these various services? Are they local? Again, subcontractors may state that they operate nationally. Do they have the coverage of labour? Do they have access to the local labour required? Historical Performance
How well do you know the subcontractor? Have they worked with your business before? How did it go? Do you have a robust method to report on subcontractor performance? Is this performance information shared from one project team to another?
Continual Review
Use a pre-qualification questionnaire (PQQ) process or other accreditation service to select subcontractors, but remember, subcontractor qualification is not a one-time event. Consider refreshing PQQ’s at least annually, and more often for critical scopes, new sub-contractors or any scopes a contractor can identify that have a heightened level of risk.
Limit Your Exposure
Even the best pre-qualification processes will not prevent defaults from happening. Therefore, it’s important to consider limitations on your exposure for any one project (project limits) and on a given sub-contractor across all projects. Perhaps set a value limit of contracts based upon a percentage of the subcontractor turnover.
Good Relationships
Having a good relationship with your subcontractors is key. Invest your time and you will be rewarded by what your sub-contractors will do for you. Trust on both sides is paramount to maintaining and growing a successful supply chain relationship.
Mitigating The Risk With Supply Chain Risk Management Software
Construction-specific software, such as ERP (Enterprise resource planning) software has been designed specifically for businesses working in construction, engineering and the built environment. Leading ERP suites, such as Coins, provide businesses with a comprehensive platform supported by integrated modules. These modules can include everything from financial management to project management.
Most importantly for supply chains, ERP like Coins includes supply chain risk management software that makes it easier to assess, manage and improve your supplier relationships and performance.
Adopting a comprehensive construction supply chain management software solution will provide you with all the tools to mitigate the elements of risk outlined above, it will also enable your supply chain to work more closely with you, provide them with future pipelines of work and therefore some level of business certainty.
Through collaboration and 360o performance reporting both yourself and your supply chain can work together to drive improvements for the benefit of all.
About Coins Supply Chain Risk Management Software
Coins Construction Cloud prevents weak links in the supply chain management process. The supply chain management software, exclusively developed for construction businesses, gives supply chain management users the means to efficiently and actively manage their most important relationships along the supply chain.
Coins Construction software improves the entire supply chain process by: providing ePQQs, performance scoring, delivering 360° relationship assessments, and enabling electronic orders and invoices between buyers and sellers, reducing further time and cost.