Spend Matters welcomes this guest article by Joel Johnson from GEP.
Network strategy changes often happen with little notice and can have major impact on the physical footprint of an organization. Whether it is a new plant construction or a commercial office renovation, tight timelines often come at the expense of a procurement diligence and competitive best practices. In an optimal scenario, completed detailed technical designs are available to facilitate the objective evaluation of construction management firms and their recommended subcontractors. This process is ideally managed by an independent project manager, either internal or external, with the active involvement of the procurement team. However, when timelines are tight, roles can blend between the design agent, project manager and construction manager. The following strategies can help ensure rigor and competition in this sub-optimal sourcing environment:
- Separate the “P” - there are numerous benefits to consolidating functions with one supply partner including speed and simplicity. However, these benefits often create situations in which conflicts of interest arise. For example, by carving out the “P” (procurement) function of an EPC (engineer, procure, construct) contract, an organization can ensure a degree of transparency even if design, project-management and construction rolls overlap.
- Conduct 2-Stage Tenders – continual pressure on project timelines can result in a situation whereby detailed technical designs are not completed prior to CM firm engagement. A 2-phase design-build process allows for earlier involvement of the primary CM firm as part of design finalization. Typically the CM firms only quote preliminaries, overhead and markup at stage one. Detailed quotes are provided in stage 2 once design specifications have been clearly established and sub-contractor quotes have been provided in an open book environment.
- Selectively Introduce Lump Sum Agreements - a lump sum agreement is an excellent way to transition risk to a third party provided there is an sufficient transparency and protection as it relates to non-performance and change orders. In situations with tight-timelines, a lack of clearly defined scope can initially prevent any lump sum opportunities. There is, however, still an opportunity to convert to a lump sum contract even if it is at later stages in the sourcing process. Many firms find that an effective transition point is once all subcontractor bids have been finalized as part of the 2-stage tender outlined above.
The use of alternative sourcing approaches to consolidate project timelines must be handled cautiously, particularly with high-spend construction projects that are critical to business operations. Provided conflicts of interest are eliminated and competitions is assured, procurement teams can help support business goals from a time, value and risk perspective.
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