Managing risk – Knowing your supply chain

As the country finds its feet again after the first coronavirus lockdown, are construction projects finding themselves on the backfoot? And were they on the backfoot anyway? 

The construction industry relies on intricate construction supply chain management. The knock-on effect of one supplier falling out of the chain can be significant, and the impact of the coronavirus pandemic has increased the likelihood of this happening meaning supply chains are more fragile than ever. 

Lockdown restrictions and new safety measures resulted in sites being shut and, in some cases, mothballed for a longer period. With most contracts getting back on track, the spotlight turns to the supply chain and whether without the support from the furlough scheme they are sustainable. Many contracts have incurred extra costs and missed delivery deadlines with no Extensions of Time in place, which begs the question: who will be responsible for absorbing these costs?

Future pipeline of materials

construction supply chain managementMany of the products required on construction projects are unique, often a bespoke design and built using a plethora of suppliers. If one of these suppliers is not able to produce the materials at the right time a ripple effect is caused among the rest of the project frequently resulting in added costs and lost time, both of which are a precious commodity on construction sites.
Embracing true end to end visibility within your supply chain will enable you to identify the risks in your chain and consider alternatives. Technology plays a crucial part here. Being able to produce real time data and using analytics to produce insights into that data will help you in getting to proper visibility.    

Insolvency in the industry 

The liquidation of Carillion in 2018 underlines the importance of knowing the warning signs of a potential insolvency in your supply chain. 

The immediate impact of the coronavirus pandemic has meant many businesses struggled with maintaining their cash flow. Although the Government has stepped in to help protect some businesses the industry must be braced for a continued increase in insolvencies and the risk that poses to supply chains. 

Knowing your contractors and subcontractors will provide early warning signs that your supply chain may be at risk of an insolvency. Being aware of concerning activity and keeping up to date with market intelligence will be key to being able to prepare and adapt to any fall out in your construction supply chain management. 

Preparing for the Brexit impact

There is much that cannot be predicted with Brexit and many pressing questions remain unanswered. Depending on how negotiations play out the effect on construction supply chains could be significant. The main concerns are around the free movement of people and goods that being a member state of the EU provided the UK. 

The industry could be at risk of a chronic skills shortage as projects rely a great deal on foreign labour. Data from the Office of National Statistics (ONS) showed that one-third of construction workers on sites in London were from overseas, and 28 per cent came from the EU. Being outside the free movement of persons provision could make a bad talent shortage a lot worse. 

Along with the free movement of people, being a member of the EU included us in free movement of goods. It is likely that essential materials from our closest trading body now will incur duty costs and considerable delays at a minimum.  

Reviewing contracts

A main, or tier one, contractor negotiates a contract with the ultimate client. They may also devolve responsibility of parts of the project to different sub-contractors, creating the start of the supply chain and a complex contractual commitment. Any delay in delivery or re-scope of the project can result in additional costs being passed down the supply chain. The main contractor could be left in a position of having little knowledge of the contracts negotiated or costs incurred further down the supply chain. 

Tier one and tier two contractual obligations are often onerous and include liquidated and ascertained damages (LADs) for late delivery. The responsibility that falls through the supply chain diminishes the further down the chain the work moves. This results in the supply chain not being effectively locked into the project, with contractors able to walk away with little responsibility.  

With the added, and considerable, challenge of the coronavirus pandemic, managing site compliance and prolonged contract delivery will leave many of the tier one and tier two contractors exposed to additional costs and lower margins. 

Reviewing your contracts and maintaining robust communications with your supply chain will help to avoid any additional costs and delays. 

Acting as the tax collector

The sector will see significant change in the way tax is accounted for and collected in the future. This will have an impact on the cash flows of the supply chain as Domestic Reverse Charge (DRC) is introduced in 2021 and off payroll working IR35 comes into force. With the Government offering further support with deferral of VAT payments, the industry questions the practicalities of implementing DRC and whether this will directly result in insolvencies in the supply chain.

Although the coronavirus pandemic has hit the construction industry hard, it has provided a rare window of opportunity to re-set what you expect from your construction supply chain. Taking this opportunity will help you get back to a front footing. 

We can help

Need help with your construction company's supply chain management? Contact Kelly Boorman to find out more.

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