Construction operating in the dark amid heightened risk in supply chains

Mike Davis, the Chief Executive Officer of Felix

Leading Australian enterprise procurement platform Felix has launched its Building in the Dark report, which examines construction supply chain risk in Australia and New Zealand.

The report was developed in collaboration with industry consultancy Entwine.

Firms in construction are operating blindly against an evolving backdrop of supply chain risks and changing business landscape, due to a huge lack of supply chain transparency.

Mike Davis, the Chief Executive Officer of Felix expounded further on this aspect.

“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.”

“The 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.”

“Many of these risks are not immediately visible and remain unaddressed by company leaders.”

Felix’s report, a rally call for stakeholders

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

“Therefore, organisations urgently need to improve supply chain risk management in order to harness better industry outcomes as well as broader social and environmental benefits.”

The report highlights 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.

“The responses indicate that companies 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 Felix’s report

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.

79% of the respondents believed that their third parties were not always fully aware of or understood the risks that they are responsible for managing under their contracts.

56% believed that they had unknowingly engaged an entity red-flagged by another area of the organisation. Only 40% 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, thus potentially low levels of transparency and low levels of monitoring of parties thought to have insufficient competencies in 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, for example 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.

Therefore, the Building in the Dark report strongly recommends effective and efficient communication and information sharing throughout the life cycle of projects.

Information flow in all directions establishes the quality of both the supplier and its extended supply chains, and to identify and manage ongoing risks associated with the network.

Davis said, “Digital offers the biggest opportunity to enable transparency and accountability in the network, maximise efficiencies and enhance the quality and safety of projects.”

Felix’s survey report calls for more use of digital tools

However, while many organisations recognise the value of going digital, over half (56%) 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.

Davis added, “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 construction industry’s landscape has shifted dramatically in recent years and the risks associated with construction supply chains are multifaceted and complex.”

“Leadership inside the construction organisations needs to ensure that they have adequate systems in order 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.”