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Subcontractor Performance Risk

Strategies for a Challenged Supply Chain in the Wake of COVID-19

Cheri Hanes | July 31, 2020

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Broken chain that says supply chain

COVID-19 has brought supply chain risks to the forefront in a way that has really gotten builders' attention. It is easy to see the possibility of supply chain impacts from direct or indirect results of efforts to stop the spread of the virus. Possible issues include the shutdown of production facilities and a slowdown of global—or domestic—product deliveries resulting from government mandates, as well as labor availability at production facilities and other human factors.

It's also possible that some materials will spike in price due to lower supply, and that could cause subcontractors to be unable to deliver work in accordance with their original bid. Compounding the seriousness of this situation is the fact that this scenario could play out again, possibly in even more dramatic fashion, in the future of our highly interconnected world.

Builders, the Supply Chain, and COVID-19

Across the board, builders report that they are strongly concerned regarding impacts to ongoing projects from supply chain challenges as a result of COVID-19 and are focused on ensuring their businesses' approach to supply chain lead-time and price addresses this risk.

Even though the concerns are top of mind, the strategies are harder to nail down. The supply chain has connections to almost every component of a construction business. Where should the effort begin? In this article, we'll look at actions you can take, now and in the future, to develop resiliency in your supply chains and hedge against future impacts.

Supply Chain Management Tactics to Use Now

This is what to do now.

  • Appoint dedicated supply chain leadership. This is a complicated subject; someone needs to own it to drive success. The role of supply chain leadership should include efforts to compile and digest the information being gathered by your various teams and fully leverage it across the organization. There are many moving parts: processes, systems, compilation and assessment of data, and the strategy to make sense of it all. In other words, this should be someone who can see the big picture and who has the authority to take big-picture actions. Whether it's a dedicated specialist or part of another position, there's value in someone taking point.
  • Implement a robust, documented, and continuous subcontractor communication plan around the supply chain. Subcontractor outreach is foundational to correctly understanding supply chain risk. They are closest to the risks and can give you the best possible intelligence on them. What might a sub outreach program include? It varies, but the common themes are fairly consistent. Talk to subs about the following.
    • Known materials status and availability. Do the subs or suppliers know there is a problem or that there is no problem? Find out.
    • Potential areas of concern. What are subcontractors/suppliers worried might become a problem?
    • Lead time and price impacts. On both, work with subs to strategize a solution. Their insights may provide a solution you wouldn't otherwise think of.
    • Comments. In a nutshell, understand what keeps them up at night. This freeform opportunity for subs to elaborate regarding anything on their minds regarding the supply chain can be very revealing—if you read between the lines. Ensure that someone does.
  • Conduct a supply chain audit for all in-progress projects and upcoming or potential projects. Make a consistent effort to understand what is at risk and where to focus.
  • Mitigate potential impacts. Plans may include alternate materials for those with the potential for delays or escalation, resequencing work to accommodate delays, or prepurchase and storage—with appropriate controls.
  • Share your knowledge. It's important to educate owners and designers. You're going to "own" this risk together for the duration of the project. Some of the smartest strategies will have cost associated or require a design compromise. Make sure everyone knows why it makes sense. If the owner makes a different choice, ask them to indemnify you for the risk with contingencies or other appropriate measures.
  • Implement a materials management plan for all at-risk materials. Track from the point of origin to your site with documentation along the way. Confirm the materials are headed your way, and know when they will arrive. Once on-site, check them in against submittals to check for correct and sufficient materials. This is an environment in which substitutions might happen. Don't leave these responsibilities to the subcontractors only; builders need to own this risk and manage it. This is a trust but verify situation.
  • Incorporate material constraints/delays into your project schedule so that it accurately reflects the actual activities on site. This forms the basis of any request for time or cost, so be sure it is accurate.
  • Consult your lessons learned. Have you experienced this in the past? What did you do then? Make sure you leverage past experiences.

Supply Chain Management Tactics to Use Later

The above list contains tactics you can use to react to the situation now, but what are some strategies to put your organization in a better position for the future? Consider the following.

  • Focus on your go/no-go criteria. Understanding supply chain challenges can help you pursue the right projects. Knowing how flexible and accommodating an owner is likely to be matters. To the greatest extent possible, try to do the following.
    • Work with owners you know and trust. You will know how fairly they manage contract issues; how flexible they are likely to be when design or material changes make sense; the certainty of funding, schedule, and cost priorities; and involvement in sub decisions. These factors matter in a challenging situation.
    • Make reasonable schedule commitments. Incorporate new realities around labor and materials in your schedule. It is likely that projects built now will not go up as quickly as those in the past. Adapt to this reality.
    • Make reasonable cost commitments. Use reasonable and current assumptions around cost. Shifting supply chains may mean there will be cost deltas from historical data.
    • Review contract language with legal counsel. The details matter with regard to risk allocation. Use what you've learned, and definitely don't take on a contract with the same problems that you have identified previously.
    • Stick to your core competencies. If there's ever been a time to double down on your strengths, this is it. Avoid "firsts" and exceptions. Play the long game.
  • Collaborate. Implement a process for projects to communicate with subs and suppliers to understand their supply chain challenges. Begin this conversation at the earliest possible stage of bidding, and continue over the life of each project.
  • Include supply chain conversations in subcontractors' qualification analysis. Identify those with supply chain redundancies and strong supplier relationships, and weigh those things in the award decision. Ask subs to disclose the value and source of all potential materials as part of their bid, and use this information to make reasonable risk management decisions.
  • Focus on resiliency. This may include redundant sourcing, redundant subs, stockpiling some materials, and building strong relationships in situations where redundancy is less possible.
  • Incorporate supply chain strategies into your business continuity plan. Whether a pandemic, strikes, tariffs, or embargoes, interruption events like these will arise again, and supply chain interruptions are typically close behind. Contemplate your approach in your business continuity plan.

With this type of strategic focus, it is possible to mitigate current risks and avoid or soften future impacts, and that is a goal worth working toward.

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