Four critical steps to navigating supply chain

A call to action for commercial and procurement professionals looking to deliver Major Infrastructure in the wake of a new labour government.

A call to action for commercial and procurement professionals looking to deliver

3 min read

UK construction supply chain demand and capacity landscape

The UK government Construction and Infrastructure pipeline 2023 forecasts the UK’s commitment of £700+ billion to deliver a range of infrastructure over the next 10 years; including delivering on policy commitments, meeting population and growth demands and building resilience of existing assets.

This high volume of demand, with heavy fluctuations in sector investment, coupled with supply challenges are raising concerns over market capacity. A reducing and aging workforce, bottlenecks in particular skills and trades, global competition and the stacking effect of major projects all contribute to regional supply chain hotspots, particularly in the South-West and East of England. This article explores what you can do to mitigate the impact of these challenges and to ensure that major infrastructure projects are delivered on time and on budget.

External and Internal shocks to the construction supply chain

In recent years the construction supply chain has been through a war, a pandemic, a steep inflation hike and changes in government policy. During the pandemic, construction output fell 40% from 2019 to May 2022, putting significant strain on suppliers financially and suffocating their ability to take risks or invest in growth. Materials inflation peaked at 26.8% in June 2022 during the Ukraine war, leading to several high-profile supplier insolvencies and reduced profits, particularly where suppliers had agreed fixed prices with no inflation relief clauses. Cancelation or delays plagued projects which had yet to agree contracts.

Peter Millar

Associate Director, Major Projects Advisory

KPMG in the UK

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Romi Alboreto

Partner, Major Projects Advisory

KPMG in the UK

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Changes in government policy and wavering commitment to major projects has caused further uncertainty and damaged confidence. Only recently, following the Department for Education (DfE’s) launch of a flagship modern methods of construction (MMC) framework, to deliver new schools and champion innovation and investment, government spend and targets decreased resulting in the framework no longer having the pipeline throughput anticipated. HS2 was first proposed in 2009 under a labour government and was continued by the Conservatives with cross party support. Following significant delays and soaring costs the original plans were progressively scaled back. Last year, the Conservative government announced it would be scrapping the line between Birmingham and Manchester entirely. Railway contractors and suppliers in the region who had invested in skills and regional infrastructure in anticipation of the pipeline of work were left with no return on the investment.

National spending shifts between sectors have led to greater complexity, especially in the energy sector supporting the shift to renewables, where the specialist skills required are less transferable and take longer to qualify in. An increase in large scale projects will impose a greater constraint for those limited suppliers which have the capacity and capabilities to deliver them.

As such, the largest risks to the supply chain’s ability to deliver does not come from the size of national demand overall, but from pipeline uncertainty, dwindled risk and growth investment appetite and the uniqueness and scale of individual projects. Whilst most of these challenges are not new and have been borne from sustained uncertainty and global shocks, there are real opportunities for infrastructure clients and commercial professionals to use the newly established political stability to reset objectives, rebuild relationships with suppliers and hit the ground running following the election.

There are 4 critical steps major projects and programmes must focus on immediately, to steady the ship and set themselves up for success.

Review and articulate links between capital investment and outcomes
Re-evaluate Procurement and Commercial Strategies
Quickly recommit your pipeline and double down on engagement
Be attractive and investable to supply chains in a hot and competitive market

Review and articulate links between capital investment and outcomes

In the wake of the disruption and changing policies and priorities caused by an incoming new government, it is critical for government departments and private sector clients with major programmes and portfolios to be able to quickly and clearly articulate why their capital works represents value for money and how this aligns with the new government (and country's) priorities. Clients should take the opportunity to review and if necessary redefine their programmes balanced scorecard based on the latest shifts in government policy.

Programmes which are ready to clearly articulate their benefits will quickly build confidence and political support, secure investment commitments and be able to continue moving forwards at pace. In our experience, programmes that get this right have a robust benefits management approach across both quantitative and qualitative measures accompanied by a clear delivery plan.

Wherever possible, benefits should be quantifiable (although key qualitative measures should not be overlooked) and be predicted, tracked and measured as the programme matures. In addition to the original drivers of the project, benefits should consider other achievements such as cost savings and productivity gains made, social benefits such as jobs created or workers trained, markets grown and wider benefits to UK PLC. Having a wide range of measures allows programmes to quickly pick out and showcase benefits which align to new government policies and priorities, demonstrating the value of the programme to the new government agenda.

Programme benefits need to be ingrained in the programme’s delivery and commercial strategy, with contractual Key Performance Indicators (KPIs) and incentivisation models linking supply chain performance to the intended programme outcomes. Those which don’t have the potential to trigger an immediate loss of confidence in the programme for any new party examining the business case. This can often lead to delays in committing support which in turn creates uncertainty in the supply chain leading to significant long term setbacks.

Re-evaluate Procurement and Commercial Strategies

Changes in policy can have a significant impact on suppliers at every level so it is important for the programme to have a robust market risk review process to be able to anticipate and quickly understand changes in appetite and capacity within the supply base. It is critical to map and review all layers of the supply chain, not just the Tier 1s, but also the key suppliers through Tiers 2,3 and 4 who will be delivering the work packages. Any new or emerging capacity issues should be addressed through targeted market shaping interventions which unblock issues and grow capacity, capability and/or appetite. These may require interventions to the packaging, commercial and contracting strategy, along with wider design, delivery and skills strategies. In-flight projects may need to adjust their commercial and procurement strategies against the new landscape before advancing to ensure they remain aligned, relevant and address any new risks particularly around supplier insolvencies and performance.

With revised priorities and realigned plans in place, programs should seize the opportunity to re-evaluate their target operating model (TOM). This critical step ensures that strategy, efforts, and resources remain focused on the most relevant areas and can be swiftly reactivated following any stand down.

Quickly recommit your pipeline and double down on engagement

Once internal work to reaffirm government support for the programme is completed and the target operating model (TOM) is realigned, swift and decisive action is required to present an aligned front to the market and shore up supplier confidence. The immediate priority is to restart funding mechanisms, commercial and market shaping activities - visibly and intentionally, eliminating any lingering uncertainty. A strong market management capability can help ensure a clear communications plan is in place to reaffirm commitment, articulate any changes to timescales and build confidence in the market. For programmes in a pre-construction stage, investing in early supplier involvement is a low cost, high impact approach that fosters engagement and builds confidence while enhancing programme intelligence through helping to identify risks, collaborate on designs and guide delivery strategies. This engagement can even be extended into prototyping or product R&D as the programme progresses.

Be attractive and investable to supply chains in a hot and competitive market

In a highly competitive market, major construction programmes must adopt strategies to attract and retain investment from supply chains. This requires demonstrating a commitment to long-term collaboration at enterprise or portfolio level and providing tangible benefits to participants.

Here are some of the levers to address this:

Programmes should offer confident returns on investment. Suppliers are hesitant to commit significant resources without a clear understanding of potential profits. Government programmes must demonstrate a track record of delivering on promised pipelines and avoid programme cancellations or reductions, whilst considering progressive incentive models that encourage shared investment.
A balanced cost/reward approach to tendering is crucial. The current practice of mini-competitions, with high bidding costs which historically can exceed £400k for major bids, discourages participation and limits competition. Programmes should consider alternative, more collaborative procurement methods that offer a fairer balance between cost and potential reward, encouraging innovation rather than sole focus on lowest tender cost.
Programmes must provide certainty and consistency. Frequent changes in direction and unclear briefs create uncertainty and hinder investment. Early release of contracts and clear communication of expectations are essential for building trust and encouraging long-term commitment.
Programmes should engage early and collaboratively with the entire supply chain, including Tier 1, 2, and 3 contractors. This allows for the development of shared goals and strategies, fostering a sense of ownership and investment.
Programmes must adopt a more equitable approach to risk allocation. Instead of simply transferring risk to contractors, programmes should consider allocating risk based on the best-placed party to manage it. This approach ensures that risks are borne by those most capable of mitigating them, leading to more efficient and cost-effective project delivery.
Programmes should consider collaborative delivery models such as alliancing or partnering that foster a longer term relationship with the supply chain based on outcome performance as opposed to defined outputs..

Conclusion

Whilst Labour outlines their spending priorities and look to ensure political stability, major projects need to re-baseline their objectives, review their commercial and procurement strategies against a shifting national supply and demand landscape and quickly reassert pipeline stability & confidence to facilitate market investment to deliver.

Reach out to Peter Millar who can help you navigate your supply chain challenges and define a solution that will set your project or programme up for success.

Four Critical Steps to mitigate supply chain challenges