Is cut price bidding undermining our infrastructure?

PETER SILCOCK, CHIEF EXECUTIVE, CCNZ

CIVIL CONTRACTORS NEW ZEALAND recently worked with Major Associate member Teletrac Navman and Colmar Brunton to complete the 2018 Construction Industry Survey.

The results were released to the public at our annual conference in Hamilton and the data collected helps CCNZ members, and New Zealand as a whole, better understand the issues contractors are facing.

As we reviewed the results, some of the numbers around procurement got me thinking. A massive 85 percent of survey respondents (and 93 percent of companies with more than 50 employees) believe poor procurement usually affects the entire project adversely.

So, this means what happens during procurement has an ongoing effect, and also raises questions about what sort of impact procurement has on the quality of the infrastructure we build or maintain.

Teletrac Navman’s survey asked contractors to rate statements, with 12 statements focused on procurement. Not surprisingly, ‘Client focus on lowest price’ was the highest-ranking response with 81 percent rating the impact as high or very high.

What surprised me was the second highest rated statement. ‘Cut price bidding by contractors’ was rated as a high or very high impact in 76 percent of responses.

Wow. That got me thinking about why contractors would behave like this in a market where I am continually told there is plenty of work available. While it is true CCNZ has expressed concerns to Government about a potential hole in the infrastructure pipeline over the next few years, that is not with us yet and many local authorities and council-controlled organisations are increasing their capital works programmes.

So why are contractors engaging in cut price bidding?

The simple explanation of strong competition for contracts (and this is the case) does not seem to explain the behaviour. The suggestion of ‘cut price’ infers that prices are lower than they should be. Could the market have spiralled down to a level that’s not sustainable? Does the level of commitment contractors have in terms of plant and people mean they can’t afford to miss out on a job because if the wheels stop turning things will fall over? Or do many contractors just not understand their own costs well enough?

The other question is if 76 percent of contractors see this as a problem, why don’t they make a change? Of course, most contractors would deny they engage in cut price bidding. It is always other contractors who do that. Are the remaining 24 percent the ones putting in the cut price bids?

I would say these factors all contribute, and part of the answer lies in the hands of contractors themselves. Reports of projects’ losses and the level of risk being passed to contractors are changing the industry’s approach to procurement.

As I travel around the country, contractors are telling me they are picking and choosing which jobs they bid for, how much risk they take on, who they work for and ensuring that the bids they put in are sustainable.

Part of the answer also rests with clients. Contractors are choosing which clients they want to work for, and in turn clients are asking the question “how can I become a preferred client”? Because they realise that they can procure a top-quality project that exceeds expectations by working in partnership with a quality contractor(s) that has well qualified staff, the right plant and strong working relationships with consultants and other contractors.

Improving procurement is a major focus for Civil Contractors New Zealand as the voice of New Zealand’s contractors. We use every opportunity to highlight the need for procurement to support a strong, healthy contracting industry with the capacity and capability to build and maintain the infrastructure we all rely on every day.

The pace of change continues to accelerate and we all need to keep pace. New technology enables us to measure and monitor more than ever before and we need to upskill our people to use these new tools and the information they produce to harness this information to better inform our operations, management and importantly our bids.

The top two survey responses in terms of procurement clearly illustrate it takes two to tango. Both contractors and clients need to lift their sights if we want to deliver quality infrastructure we can all be proud of. 

Does the level of commitment contractors have in terms of plant and people mean they can’t afford to miss out on a job because if the wheels stop turning things will fall over?