Cost-driven traditional procurement – Is the writing on the wall?

Allen Leatt’s (CEO IMCA) portrayal of the Offshore Windfarm industry, reported in Energy Voice daily newsletter on 22 February 2023, reflects precisely my own experiences, not only on windfarm projects but also solar energy projects. Allen Leatt has warned, “…A wave of unprofitable offshore wind contracts could see firms focus instead on cash-rich oil and gas…”. The only thing I find surprising is the length of time it has taken contractors to say “enough is enough” in the face of such one-sided owner/investor contracts.

A great deal of publicity has been given to the expected volume of work over many years in engineering construction deriving from Energy Transition / Net Zero 2050 projects, and the beginnings of which is now appearing and is likely to accelerate, especially given the recent USA investment support and likely similar initiatives in Europe. Windfarm and solar projects have, of course, been around for several years and, along with evolving technological carbon reduction projects, are expected to form a significant part of the shift away from fossil fuel usage. However, in the short to medium term, conventional fossil fuel projects will continue to provide significant business opportunities for engineering construction globally. So how will the global engineering construction industry be able to deliver what looks like a very significant volume of work at a time when the resources required to undertake that work are scarce without an obvious replacement plan on the horizon?

Collaborative Contracting

Given the inherent resource wastage that has typically characterised project performance and delivery for decades, one contributory solution could be a much more effective utilisation of available resources through collaborative contracting and working, together with the universal adoption and use of modern project delivery tools and practices. Not only is this likely to free off valuable resources to cover more projects concurrently, but there is evidence – for example, research by the UK’s Constructing Excellence ‘Collaborative working: the principles‘, or case studies of projects adopting the ECITB’s  Project Collaboration Toolkit – that such an approach reduces project delivery times, lowers cost, improves productivity, increases safety and quality and enables more accurate forecasting of project results throughout delivery.

Owners need to lead

It is for owner/investors to make the change – abandon the procurement model that promotes a “race to the bottom” via unbalanced risk distribution, lowest cost and unattainable delivery times, and join enlightened owner/investors, their contractors and supply chain who have already recognised the benefits of moving away from traditional project procurement and delivery to a proper value based and incentive-driven approach. In what is likely to become predominantly a “sellers’ market”, those owner/investors that don’t adopt a fundamentally different procurement and delivery model will, as Allen Leatt suggests, face a smaller choice of contractors and supply chain for their projects, whilst the others pursue projects that offer more favourable commercial opportunities. I believe “the writing is on the wall” for cost-driven risk-laden contracts procurement models.

John Fotherby – Partner Kingsfield Academy