Risky Business – How to manage risk in your supply chain
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? COINS supply chain expert David Bullock explores how to mitigate risk across construction supply chains, and how COINS supply chain 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 because of 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 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, 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, ultimately causing issues between you and your end client. It may also damage your reputation within the construction sector.
Spotting the warning signs within the supply chain
- 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
Mitigating the risk
You can explore the COINS supply chain management software solutions here. COINS is a construction software designed specifically for businesses working in construction, engineering and the built environment.
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.
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?
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?
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.
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.
It works both ways
To manage this process effectively you need to consider how you manage your subcontractors and your wider construction supply chain partners.
Do you have the systems and processes in place to help mitigate your risks, as outlined above? Do you have a collaborative working relationship with your supply chain? Do you need to implement a Supply Chain Manager software solution?
Adopting a comprehensive 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 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.
David Bullock (pictured) will be delivering a speaker session on 'Managing Risk in the Supply Chain' at the Software In Construction Show 25 JUNE 2019 12.30pm Visit COINS on Stand S4 during the event to find out more about COINS construction software.
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