Construction operating in the dark amid heightened risk in supply chains

The recently released Building in the Dark report finds that organisations in construction are operating blindly against an evolving backdrop of supply chain risks and changing business landscape, due to a staggering lack of supply chain transparency.

The report, developed by Felix in collaboration with industry consultancy Entwine, found that 79 per cent of the organisations believed their third parties were not always fully aware of or understood the risks they were responsible for managing under their contracts.

“We are seeing a major confluence of significant issues in construction today due to Australia’s historic infrastructure boom and more recently, the impact of the COVID-19 pandemic,” Mike Davis, CEO, Felix said.

“The consequent skill shortages, greater reliance on outsourcing and sharply increasing cost pressures are just some of the challenges dialling up the overall risk of adverse outcomes for projects. Alarmingly, many of these risks are not immediately visible and remain unaddressed by organisational leadership.”

The report highlights significant issues that contribute to risk in projects, including lack of supplier due diligence, lack of effectiveness in ongoing supply chain risk management, communication and information sharing within organisations and externally with the wider supply network.

Leah Singer, author of the report and director of Entwine, said the report was a “rallying call to action” for the industry to play their part in this increasingly complex supply network environment.

“Organisations need to improve supply chain risk management towards better industry outcomes as well as broader social and environmental benefits,” explained Singer.

“Broadly, the industry responses indicate that organisations are primarily focused on protecting the here and now of project delivery. Concern about risk outside of the traditional paradigm is significantly lower, including the risk of modern slavery, fraud, corruption, or the black economy.”

Key findings from the report include:

• Construction supply chain risk on the rise but remains prioritised against the traditional project management metrics of time, cost, and quality – The industry is dealing with greater complexity due to more suppliers, complicated workstreams, compliance requirements and difficulty sourcing eligible parties. While organisations recognise the importance of regulatory compliance, they are less concerned about ensuring that quality obligations can be met in the future.
• Organisations lack transparency over the supply chain network – 56 per cent believed their organisation had unknowingly engaged an entity red-flagged by another area of the organisation. Only 40 per cent of participants believed their organisations were never subject to optimism bias in the reporting of projects or business operations involving third parties.
• Risk management can become risk transfer to parties not fully equipped for this responsibility – Responses point to poor contract literacy, which results in potentially low levels of transparency and low levels of monitoring of parties thought to have insufficient competencies around risk management. A lack of budget and time are cited as barriers to upskill suppliers and to audit ongoing compliance for contract requirements not related to output performance.
• Severe economic failures and disintegration imminent if industry fragmentation persists – Communication silos within projects, such as poor information-sharing on both suppliers and supply chain risk, can lead to heavy losses and detrimental outcomes for the current projects across the country and ultimately, the breakdown of the entire sector.

The report strongly recommends effective and efficient communication and information sharing throughout the life cycle of projects. Enabling information flow in all directions will help establish the quality of both the supplier and its extended supply chains, as well as to identify and manage ongoing risks associated with the network.

However, while many organisations recognise the value of going digital, over half (56 per cent) of the research participants believed their organisations were not investing enough in digital tools. The lag in adoption prompted Felix and Entwine’s joint submission to the recent Parliamentary inquiry into procurement practices, outlining strong recommendations for digitisation to promote efficiency, meet capacity constraints while modernising procurement.

Construction is at a critical juncture, with the number and complexity of large projects colliding with rising costs, supply chain constraints and increasing competition. The landscape has shifted dramatically in recent years and the risks lying in construction supply chains are multifaceted and complex. Leadership in construction organisations need to ensure they have adequate systems to drive transparency, accountability and sustainability throughout their supply chains as we embark on an unprecedented level of building and infrastructure.

Effective risk management is a whole-of-industry issue, and it requires a demonstrable commitment from all parties, including industry leaders, clients and government.

About the Building in the Dark Report:

The Building in the Dark report is based on a survey of over 150 individuals across both Australia and New Zealand, a selection of one-on-one participant interviews, and extensive desktop research of existing reports and industry commentary.

To download a copy of the Building in the Dark report, please visit this link.