Where are the trends in procurement driving us?
Published March 4th, 2010
“We are driven by the way the water market is organized and procured.” So says design-build consultant Ken Hume in an interview for our forthcoming report on the US water market. It is a pertinent observation with a broad relevance for everyone working in the US water market, as well as those eyeing it for future expansion.
The US procurement system is gradually changing. Historically, it has been dominated by the design-bid-build model, whereby a design firm, appointed on the basis of experience, draws up plans which are then put out to construction firms appointed on the basis of the lowest bid. The architectural engineers – such as CH2M Hill, Black & Veatch, MWH, CDM, AECOM – enjoy a reputation like that of doctors: trustworthy people who are entirely dedicated to the well-being of their clients. Construction contractors, meanwhile, are dirty profiteers who would cut every corner if it were not for the valiant efforts of the engineers.
To link these two groups with the equipment suppliers, there is an undergrowth of independent sales reps and distributors whose job it is to influence the design engineers to specify their client’s equipment so that the construction contractors have to buy it.
It is quite different from the rest of the world, where the EPC (engineering, procurement and construction) model prevails. Here, the distinction between the noble engineers and the dastardly contractors does not exist. They work together under one roof to meet the client’s specifications at the lowest cost, and they procure equipment directly from the suppliers or their local agents.
The US system worked well when local government put up 5% of the money, state funding provided 15% and federal grants the remaining 80%. Under those circumstances, quality and transparency were more important than overall cost and risk. Those days are long gone, and with the end of the stimulus package, federal grant expenditure can be expected to fall to zero. At the same time, city finances are wearing thin, and municipal appetite for risk is very much diminished. Within five years, we predict that the proportion of projects procured on a design-bid-build basis will have fallen below 50%.
It will change the entire market. Engineers – currently obsessed with charging their time out to projects – will have to learn about risk management, procurement and cost-cutting. The construction firms will lose their home town advantage, and will start looking for long-term relationships with designers. The regional rep system for equipment sales will have much of the value squeezed out of it. It creates opportunities for market entrants at every level.
Interestingly, it is larger, higher-tech projects which seem to be moving over to the design-build model first. There will be a rump of smaller, low-tech, design-bid-build projects to support a declining ecosystem of design-only firms, local construction companies and impoverished reps for many years to come.
Another point which has come up in the research is that the switch will not go straight from design-bid-build to design-build. It seems that the fastest growing method of procurement is “construction manager at risk”. This is a hybrid arrangement where the design firm works up a 30% design for a project with the client, then brings in a construction manager selected on the basis of experience to work up the designs to the final stage. As each aspect of the project is mapped out, the construction manager offers a guaranteed maximum price for the work. The client pays the bills up to the guaranteed maximum price, and the construction manager earns a fee for the work. The model seems popular with engineering and construction firms. Neither have to worry about direct price competition with other bidders on the contract. It is popular with clients because it limits their financial risk.
It is difficult to know how the CM@R model will shape the supply chain as it grows in popularity. One thing is certain, however – the model is absolutely incomprehensible to foreigners. The great US engineering firms will avoid full-scale competition with international market entrants for a few years yet.