Protecting the supply chain in mega infrastructure projects

Traditional business practices and delivery models appeared flawed, as they fail to plan and organise the construction of mega projects when a crisis hits. Read more from Peter Gill, Director for Infrastructure at Donald Cant Watts Corke.

Early contractor and supply chain involvement is perhaps the most critical challenge facing the Tier 1 Contracting industry at present.

With recent announcements by Perrottet and Pallas, the State Treasurers of New South Wales and Victoria, of nearly $3.2 billion of infrastructure spend into the economy every month, an impressive new benchmark for the civil construction industry has been set.

Notwithstanding the complexity of these mega projects, supply chain management necessitates the involvement with suppliers at an earlier stage and in a more engaging way than clients and industry may be used to in the past.

Traditional approaches include the obtaining of prices and lead times for major commodities such as concrete, aggregates, and bituminous products, just prior to lodgement of tender. However, the timing of these enquiries may not be in that part of the project lifecycle that would
promote the supply chain to add value through innovation and the management of long lead items.

Early contractor and supply chain involvement in mega projects can therefore provide assurance to budget and program constraints, and prevent lengthy contractual disputes in the future.

The Problem

The challenge around early contractor and supply chain engagement is not new and was recognised back in 2018 by the then Executive Director of the Australian Construction Association, Lindsay Le Compte, who said:

“The client has an obligation to ensure that they have undertaken all of the relevant background investigations to enable them to develop an appropriate tender specification.”

“They must have thought through the key commercial, operational and related risks in their project and worked out how they are going to deal with them, and they need to select a tenderer with demonstrated capacity and commitment to work collaboratively with them to successfully undertake the project.” (Lindsay Le Compte the 2018 National Construction Equipment Convention, Sydney).

DCWC supports this initiative and, in line with state budgeting guidelines for high value, high risk projects, endorses the statement that the foundation for mega projects should be built on professional judgement where there is confidence that it can be achieved through good planning
of hard and smart work.

DCWC believes that such statements should apply to early contractor and supply chain involvement as well as the traditional stakeholder, commercial, operational and their related risks pre-lodgement of tender.

Significant challenges facing Tier 1 Contractors in relation to supply chain risk have arisen due to two main factors:

The unprecedented spend on mega infrastructure projects – more than 2.5 times that of the previous spend during the mining boom period between 2007 and early 2013.
The global pandemic of COVID-19 where key manufacturing zones such as Wuhan and South Korea have been affected by widespread quarantines, factory closures, and logistics disruptions.

These two major factors will have both short and long term impacts on mega infrastructure projects, and if it is true that clients have the obligation to ensure that they have undertaken all of the relevant background investigations to develop project specifications, then these clients should begin addressing these issues at the earliest opportunity.

Impact 1 – Unprecedented Infrastructure Spend

The challenge facing Tier 1 Contractors in relation to supply chain risk has been created by the new benchmark in unprecedented infrastructure spend.

To put this in perspective, the combined spend promised by the state Treasurers of Victoria and New South Wales over a 48-month period, equates to a spend of $3.2 Billion per month. This is almost the equivalent of the construction cost of a Western Sydney Airport (the construction component) every single month for 48 months.

Realistically, this predicted spend is unlikely to happen in the proposed time period, and we will continue to see mega projects for the foreseeable future. State and Federal Government will continue to respond to community expectations for new infrastructure and more liveable
cities. The future for mega projects is therefore optimistic, and there will be greater opportunity to reduce the cost of these projects through efficient design, innovation, and good planning of hard and smart work.

Supply chain management has in the past, primarily been the responsibility of the Project Manager, but the complexity of high risk, high value infrastructure projects, means that involvement with suppliers is necessary at an earlier stage and in a more granular manner than in past.

The traditional approach of obtaining prices from supply chain organisations during the tender period for major commodity such as concrete, aggregates, and bituminous products, may mean that these suppliers are engaged too late in the project lifecycle to optimise the opportunity to add value through efficient ‘design, innovation and hard and smart work.

The end result is a lost opportunity to achieve economic, efficient, and effective outcomes.

Impact 2 – COVID-19 Pandemic

The importance of supply chain resilience and risk management is more apparent than ever. As companies seek to strengthen operations and business resilience, they must set up crisis management mechanisms to see operations through situations of uncertainty.

The impact of the coronavirus (COVID-19) on global economies and the major supply chains for mega projects, are now beginning to emerge and may have a wide range of impacts on those companies in Australia who have not secured the long-lead items, and major commodities for current project commitments.

Companies who have previously relied on rapid delivery, and who have kept minimal inventory (spares), will be those most impacted.

Key manufacturing zones in Asia such as Wuhan and South Korea have been heavily affected by wide-spread quarantines, closure of factories, and disruptions to deliverability.

In the short term, the deliverers of mega projects will need to take urgent steps to maintain the initiatives of efficient design, innovation, and good planning of hard and smart work. Take for example the sourcing of tunnel boring machines, and other such complex machinery required for mega projects. Such steps may include:

Searching further afield for alternative sources of supply (e.g USA, Germany, and Japan)
Managing long lead times for design, manufacture, delivery and assembly
Securing a large inventory of critical spares; and
Renegotiating supply chain contracts

There is no doubt that in the long term, the COVID-19 pandemic will influence the decision makers around supply chain management in the future.

The risk of a future pandemic is already starting to appear as a contingent risk item in the design and risk planning for mega projects.

Key decision makers are actively engaged with the supply chain around the globe, seeking to secure a larger inventory of critical spares, and make greater use of digital engineering technology to mitigate the impacts of COVID-19 and the possibility of another pandemic in the future.

The Future of Mega Projects

Despite the challenges of securing the supply chain for mega projects, the future for infrastructure is an optimistic one. Their role in the construction industry in Australia will be an important one.

This optimism presents a significant opportunity to engage earlier and secure the supply chain for these important projects.

DCWC offers three key initiatives for companies to consider going forward:

Be proactive in contract managing its suppliers, engaging with them early in the project lifecycle to secure availability and deliverability. Companies should also ensure that their key suppliers have forecast and disaster recovery plans.
Companies should avoid exclusivity clauses that may prevent them from seeking greater geographical diversifications, including on-shoring of critical activities, and investing in the use of automated plant and equipment to reduce the risk of future pandemics to production and delivery.
A key focus is for Companies to procure the appropriate resources and capability now, for early engagement with the supply chain in the future. In Australia, there is a shortage of resources, so it is not in a position where structural adaptation is required. A Company that has the right resources and capability in the current market, will have a distinct competitive advantage in the future.

Conclusion

Although it was not immune to the impacts of COVID-19 globally, Australia has, on the whole, demonstrated remarkable resilience to this crisis.

The construction and infrastructure sectors were an early target for stimulus to support the economic recovery nationally, and securing the supply chain for the foreseeable future is but one of the initiatives that can be implemented to mitigate current and future risks of such a pandemic.

COVID-19 also presents a significant opportunity for Australian Companies to refresh business continuity and crisis management plans. Having a deeper understanding of the current issues will allow Companies to plan for, and respond to the impacts on local and global supply chains, cash flow, and resource and capability. Implementing these mitigation strategies will give these Companies the competitive edge in the future.

And finally, documenting the initiatives and action plans will allow for later assessment of best practice and will assist with possible future contractual complications.