Low productivity and increasing tendering/procurement costs have traditionally been among factors driving downward pressures on margins, for both contractors and their supply chain. Moreover, legislative requirements around sustainable procurement are adding another kind of pressure.
“The system of subcontracting in Australia has some distinctive features and presents particular challenges.”
"The construction industry in Australia is very busy. However it is very difficult to make a profit and it is not sustainable."
The Health of the Australian Construction Industry Report
With the reliance on third-party vendors being here to stay, there are clear opportunities to improve the very first interaction that would lay a foundation for strong supply chain relationships. Previously, we have gone back to basics to discuss what prequalification is, this article discusses the wider industry landscape and the need for standardisation.
The biggest expense at many large organisations in construction, infrastructure, mining, and utilities can be subcontractors, with their subcontractor spend comparable to their direct personnel spend.
Yet, many still:
Indeed, prequalification done well is recognised as an efficiency gain:
“Short-listing of contractors will benefit the industry by reducing the costs of preparation/submission of abortive tenders. The cost of tender preparation is a major component in any contractor’s head office cost and reducing this cost can only benefit the mine owners in the medium to long-term.”
Relationship Contracting in the Australian Minerals Industry
Taking it further, industry bodies in these sectors are also starting to realise the need for industry-wide accepted standards to procure, prequalify and manage third-party vendors:
“In some circumstances it is evident that purchasers with an established pre-qualification process are not leveraging it to its fullest potential, nor integrating some of the best practices of pre-qualification to make the process more effective. Furthermore, there is an opportunity for these parties with an established pre-qualification process to collaborate with each other to incorporate these best practices.”
The Australasian Railway Association (ARA)
It’s good that many are doing prequalification – whether to an efficient extent or not. But it can be much better if there are best practices incorporated, and some sort of standardisation to ensure harmony and reduce duplication.
“Only 20% of companies provided any information on the gender division of either their labour hire or contract workforce - only 10% provided data on their Indigenous labour hire and/or contractor workers.”
The rise of the stakeholder economy, along with legislations around social and sustainable procurement targets, has put the spotlight on improving supply chain diversity, and raising the quality of vendors across the board.
Industry bodies such as the Australian Constructors Association (ACA) has echoed this in the nation-first Construction Industry Charter – which has “Improve industry diversity” and “Build social license to operate” among the commitments:
Similar priorities are also seen in the mining sector, as pointed out in a recent EY report that the number one risk for miners is license to operate.
A topical issue over the past couple of years is modern slavery risk in supply chains with low visibility due to complex labour arrangements, e.g in the property and construction industries.
“A key initial focus of an effective response to modern slavery risks will be on consolidating supplier information held across the business or group and developing a human rights or modern slavery specific policy that can be cascaded through procurement and commercial practices.”
Indeed, the first step towards sustainable procurement is asking your supply chain the necessary questions through the prequalification process.
However, policies and public sentiments can evolve quickly and complex to navigate. Hence what those “necessary questions” are - may not be as obvious without a standardised prequalification framework that incorporates industry best practices.
Government agencies already have standardised prequalification systems to prequalify contractors to do government construction contracts.
The key features and benefits of these schemes are:
Now there’s no reason why something similar can’t be replicated for the next level down the supply chain, where contractors prequalify their subcontractors.
Industry bodies such as ARA are recommending a standardised prequalification framework, so that organisations can engage the right vendors, do so in an efficient manner (not wasting time & resources), while raising the standards of everyone in the supply pool.
Standardised prequalification can take the shape of:
Whatever form it takes, there are similar success factors:
Want to learn more about standardised prequalification? Check out our on-demand webinar on Vendor OptiqualTM – a prequalification framework built on industry proven standards.
The concept of engaging external parties to do work for your business is probably as old as the concept of business itself. The inherent us vs. them relationship means there are often procedures, documents, and checkpoints, to make sure the vendor does things in your best interest.
Knowing your third-party suppliers and contractors is no longer a nice-to-have. It’s a prerequisite for supply chain risk management. With supply chains becoming increasingly complex and volatile post-COVID, organisations should re-examine the very processes that underpin how they deliver goods/services.
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