Construction firms who deliver major projects throughout Australia and New Zealand (ANZ) are operating in the dark in regard to supply chain risks, a new report has found.

In its latest report prepared in collaboration with industry consultancy Entwine, enterprise construction procurement platform provider Felix surveyed over 150 ANZ professionals across the resources, utilities and public construction sectors and conducted in-depth interviews to identify challenges in supply chain risk management along with current approaches to addressing these.

The results are concerning.

Among those surveyed:

• Between 71 percent and 92 percent are somewhat or extremely concerned that third parties who are engaged on their projects may fail to meet commitments regarding program delivery (92 percent), price (90 percent) quality (83 percent), environmental management (81 percent), compliance with codes and standards (79 percent) and health and safety (71 percent).
• Across most categories of risk (refer below) only around half or less (generally around 30 to 50 percent) believe that their organisation’s due diligence which is performed on third parties and the extended supply chain is effective in mitigating risks in question.
• Around half (50 percent) lack confidence in their organisation’s ability to identify, detect and respond to instances of black economy activity within their supply chain. More than three in ten (31 percent each) lack confidence in their organisation’s ability to do likewise in respect of fraud and corruption and cybercrime.
• 79 percent believe that third parties who they engage are not fully aware of or do not fully understand the level of risk which they are responsible for managing under their contracts.
• 56 percent believe that their organisation has unknowingly engaged an entity which has been red flagged by another area within their own organisation.

The latest report comes amid increasing expectations on companies to manage their supply chains proactively and effectively.

Enacted in 2018, the Modern Slavery Act requires large companies (greater than $100 million in revenue) to report annually on risks associated with modern slavery in their operations and supply chain along with actions to address those risks.

The report also comes as Australia gears up to deliver a massive pipeline of infrastructure work amid significant shortages of materials and skilled labour.

Leah Singer, report author and director of Entwine, said the importance of supply chain risk management should not be underestimated.

Singer says the fragmented nature of the construction sector along with the complex nature of subcontractor, materials and equipment-focused supply chains gives rise to a multitude of risks.

In the report, these are categorised into four areas:

• Performance related risks, such as those related to time/cost/quality/CSR, skills shortages, insolvency/liability and social and environmental targets.
• Compliance related risks around areas such as health and safety, environment, building codes and standards and modern slavery.
• Criminality related risks such as black economy trading, cybercrime and fraud and corruption.
• Uncertain world risks such as climate risk and force majeure events.

Meanwhile, expectations around accountability are increasing.

At a client level, Singer says many public sector and larger corporate clients already require accountability measures from their contractors such as ISO quality accreditations as prerequisites for being awarded work.

More broadly, increasing societal expectations have been highlighted through the banking royal commission and the Modern Slavery Act.

Singer adds that ideas about risk always being transferable to third parties  may be misconceived – for example, warranties may fail as a risk transfer mechanism if the party in question enters insolvency and is unable to honour warranty commitments.

Mike Davis, CEO of Felix, agrees.

Davis adds that problems which can appear to be relatively small can become ‘landmines’ and have significant consequences if left unchecked.

Citing the example of collapsed construction giant Probuild, Davis says challenges on even a small number of projects can lead to significant consequences including corporate failure.

Asked about underlying and weaknesses in the construction sector which can lead to problems, Davis and Singer cite several areas.

First, there is the fragmented nature of the industry referred to above along with the large number of participants who come together for short periods to work on projects.

Next, the tendency for procurement to be driven by lowest cost can lead to corners being cut.

One finding from the report was that some companies engage in this practice unwittingly. This can occur where non-price criteria are not assigned adequate or correct weighting or where such criteria lack clear and objective measurements for assessment. Where this happens, such criteria can end up playing second fiddle to price and having no meaningful impact on the selection process.

Third, the report highlights problems which can occur where responsibility for managing risk is transferred via contract to sub-par third parties. This can create challenges where contracted suppliers fail to fully understand their responsibilities or to possess adequate competencies and processes around risk management. Such cases can result in risk transferred to parties who are not adequately equipped to manage their responsibility.

Next, coming years will see enormous pressure on resources as the industry gears up to deliver a record pipeline of work at a time of supply disruption and shortages in skilled labour and materials. This may create opportunities for cowboy vendors and lead to greater reliance upon vendors whose risk management practices are not up to scratch.

Such pressures may also cause existing suppliers and subcontractors to become overextended from either a resource or financial viewpoint and to be unable to meet their project commitments.

Longer term, there are further concerns that the sector’s ability to attract and retain a sufficient number of skilled workers may be compromised by its poor culture and difficulties in increasing female participation in its workforce.

Finally, the pandemic has led to further supply challenges on account of social distancing, slowed up production on sites and in factories and shipping-related disruptions. Meanwhile greater reliance upon online communication has led to higher levels of vulnerability regarding cybercrime in parts of supply chains.

To manage risk effectively, Davis and Singer say several measures are needed.

First, information sharing is critical.

To effectively manage risk, Singers says potential risks need to be identified, planned for and monitored with all parties understanding what needs to be done should adverse events materialise.

This involves two-way communication with both immediate vendors and the extended supply chain.

Within organisations, it also involves information being shared across projects.

To enable this, software platforms can provide a single source of truth and a central location for such communication to occur.

As things stand, Singers says important information is often prepared using manual spreadsheets and kept in data silos.

On a related note, Davis says it is important to have access to the right data and information which is needed to effectively manage risks.

Where possible, this should be available real-time. One builder with whom he recently spoke received reports about schedules and project progress only monthly. Given how quickly problems can unfold, Davis says this is not adequate.

Next, strong governance processes are needed in regard to data management and collection as well as broader risk management. These must be understood by all parties.

Finally, to facilitate all this, stakeholders need to be connected.

Speaking of technology, Davis says platforms such as Felix offer a rich tapestry of data which is needed to understand risk, make important decisions and connect stakeholders on a single portal.

The software can also help to ensure that processes are adhered to by, for example, validating that information in one screen has been correctly entered before users can proceed to the next screen.

By bringing various modules together (vendor management, procurement schedules, sourcing and contracting and vendor marketplaces) Felix also offers a more holistic understanding of procurement and supply chain risk.

When considering engaging a particular vendor for a project, for example, the software will highlight that vendor’s past performance on previous projects for which it has been engaged with your organisation. Where the software identifies that the particular vendor is engaged on a large number of other projects for your organisation, meanwhile, that may highlight potential concerns about the vendor becoming overstretched.

Davis and Singer say action is needed across the industry.

“The report is a rallying call to action for all parties in the industry to meaningfully play their part in managing risk in this increasingly complex supply network environment,” Singer said.

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

Davis agrees.

“Construction is at a critical juncture, with the number and complexity of large projects colliding with rising costs, supply chain constraints and increasing competition,” he said.

“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.”