Minimising construction procurement risks with a digital approach

21 January 2025

The construction industry has long suffered from complex supply chains, little standardisation and low margins. In a climate of technological evolution and opportunities to innovate, the industry faces a challenge in how to best utilise new technology and data sources to benefit from efficiencies in modern methods of construction while relying on a vertical and fragile supply chain. This is further exacerbated by planning consent constraints, lengthy working capital cycles, low margins, legacy contract losses and a nervousness from funders. 

Construction projects can span extensive periods, with complexity in design and changes to delivery along the way. Timelines from procurement to mobilisation can be significant, and economic changes can result in the original costings and supply chain altering, leaving the main contractor to manage risks that were not foreseen at the time of entering into the contract.

Businesses often build a pipeline in excess of capacity, with assumptions around delivery times, supply chain costings and funding requirements. Any cog in this process across multiple projects can create financial instability and result in contractors being burdened with poorly performing contracts and a disrupted supply chain—like several jigsaw puzzles with missing pieces or pieces that don’t fit. 

In this article, we will explore how the construction industry manages these risks and what the challenges are to changing the procurement process. 

The challenge of accurate pricing and supply chain oversight

One of, if not the biggest, challenge for the construction industry is pricing the project accurately at the beginning. While we could focus on the numerous issues at the procurement stage—such as better modelling, supply chain diligence, and delivery techniques—the reality is that the main contractor often lacks visibility of all of the potential twists and turns of the contract.

Steps can be taken by businesses to ensure that the supply chain used is stable through financial and ethical diligence, as well as transparent and honest relationships. However, with an average of 24 subcontractors required to build a house, major infrastructure projects face significantly higher numbers, potentially even double this amount. How can a main contractor have real oversight of the supply chain?

Learnings from events such as COVID-19 and global political instability have led businesses to invest in new technology to help them better understand the supply chain and to be able to predict the impact of a changing environment.

Rebuilding confidence in construction procurement

Many businesses were burnt by the pandemic, scalded by inflationary rises, and have come back with a clear strategy to take control over their pipeline and power to negotiate. In a climate where the industry has lost confidence in certainty around project commitment and mobilisation timings, contrasted with major public infrastructure and healthcare projects being a focus, this leaves the government in a sticky position as contractors say “no” to delivering to unrealistic pricing models with uncertain delivery times.

A snapshot of major construction projects in the UK highlights the scale of the challenge. The total value of these projects amounts to trillions of pounds, with the average contract term exceeding six years. 

Data also shows there are billions of large projects on hold or shelved currently in the UK at various stages in the procurement cycle.

Strategic steps to manage construction growth

The changing fiscal rules announced in the autumn budget, along with increased infrastructure spending, are set to stimulate construction projects. Yet, some legacy challenges persist, and the supply chain remains fragile with an ageing workforce and shortage of skilled labour to deliver current activity. It is crucial for construction businesses to consider any steps they can take to manage growth in the forthcoming period.

1. Collaborate with the supply chain

Piecing together supply chains is one of the most challenging aspects of procurement, given the vast and fast-moving network of firms involved. Procurement should serve as the critical juncture where the supply chain converges to thoroughly assess risks and develop a comprehensive reporting model. Increasingly, we see practices moving towards joint procurement and reporting to share these risks.

The recent spike in construction insolvencies underscores the importance of collaboration. Bringing forward payment terms to support subcontractors further down the chain, who may have been impacted by other projects, is crucial. Building strong relationships with suppliers is key to navigating these challenges effectively.

Funders and professionals need to better understand the working capital cycles and risks of failure, being more diligent in their enquiries and challenges of leadership teams and boards. On the other hand, funders need to also make finance accessible, affordable and in line with the government’s ambition to get Britain building. Funding ringfenced only for high-profit projects and low-risk activities will not achieve these targets.

2. Ramp up use of technology in bidding process to gather data

Implementing technology in real-time to provide greater transparency on contract performance and on completion, while sharing lessons learnt as an industry, would be transformative. The better use of Building Information Management (BIM), risk management tools, modelling via digital twins at an early stage to gather data, sharing project risks, and scenario mapping will aid the industry to make change. Given the volatility, real-time data collection and analysis, rather than annual reviews, is vital. 

3. Know when to walk away

Construction projects are litigious, with penalties and clauses built in at several milestones. While higher costs are most apparent during the construction phase, they often stem from issues encountered earlier in the project. Uncertainty in project direction or rushed mobilisation can lead to escalating costs. Despite significant investments, it is crucial to recognise when to walk away at the tender stage and to focus on profitability not revenue growth.

Without government help, the cycle will never be broken 

In a report published in October 2024, the National Infrastructure Commission found that the UK experiences the greatest year-to-year volatility in public capital investment compared to the other large economies. The lack of long-term direction and the project-to-project nature, as opposed to a structured programme, have contributed to many of the challenges faced. 

While reforms in planning and apprenticeships are underway to alleviate industry issues, questions remain around the timing of these reforms and the government’s ability to make the change desperately needed. It is crucial to focus on the procurement reform of large infrastructure projects. Bids have long been assessed on additional criteria such as social impact and carbon reduction, but the government must incentivise innovative proposals and stimulate more funding and better risk management.

Kelly  Boorman
Partner, Head of Construction
Kelly  Boorman
Partner, Head of Construction