May/June 2024 - 119

Ensuring Price Certainty: A Team Effort
Contractors need competitive pricing.
Owners and project stakeholders need
value for money and price certainty.
Interconnected, global supply chains
and multiyear projects are ensuring
that material and consumable supply
price volatility must be addressed in
project risk registers.
Commodity supply quotes and
contracts do not match the bid validity
durations required by tender packages,
nor are the commodity suppliers in the
best position to bear the risk of the
supply volatility. As a percentage of
contract value, the effect of the risk
grows in proportion as we move down
the contractor supply chain. What may
be a 2% risk for the owner or general
contractor could easily be a 20% or
greater risk for a material supplier.
It is a difficult process to analyze the
volatility risk to carry in a bid price
while remaining competitive. The
upside risk is minimal if supply prices
drop, but
the downside risk has no
backstop, and is theoretically infinite.
There is a whole industry of specialists
playing this volatility - as if trading a
commodity - and just as many of
those specialists are getting it
incorrect
as correct!
The best antidote to volatility is to
have quick analysis and decision
making so the contractors can execute
purchase contracts and fix risk, this is
not always practical. Complex, multiyear
projects often require technical
proposals and long reviews by owners
prior
to releasing contractors to
purchase materials. This often extends
past the quote validity of suppliers, reexposing
the contractor
to price
volatility risk. Design-build contracts
also expose contractors to these material
risks, as the supply risk must be carried
through the award, design and review
process prior to fixing supply prices.
*
Opportunities to expose bid quotes
and reprice. This raises competitiveness
questions if part of the
project review and award process. If
done after award, the stakeholder
groups are exposed to not having a
full suite of information for analysis
prior to close.
A regular column
from the DFI Risk and
Contracts Committee
By Dave Wiley, P.Eng.,
Green Infrastructure
Partners
It is a difficult process to
analyze the volatility risk
to carry in a bid price while
remaining competitive.
Owners and project delivery teams
are realizing that it is unfair to burden
the contractors with this risk (and often
does not provide value back to the
project stakeholders). Numerous contract
mechanisms are appearing to
mitigate these risks. Some examples are:
*
Agreements for tighter decisions and
review periods by owners. These are
never fast enough, and often require
impractical decision timelines down
the contractor chain.
*
Owner supplied materials. This
exposes owners and contractors to
supply risks and material suitability
risk. What exactly was procured,
how will it be delivered, who takes
responsibility and when.
* Material index benchmarking. Broad
market indexes rarely match the
movements of specific construction
materials, and can even move in
separate directions, exacerbating the
price volatility problem.
While all these solutions are trying to
solve the problem and show recognition
that neither the contractor nor
the material supplier is in the best
position to bear the material volatility
risk, all introduce different risks to the
contractor.
Projects are going to continue to get
more complex, and the durations of
megaprojects will extend.
If a foundation contractor does not
have an acceptable mechanism through
the contract or supplier agreement to
manage the risk, then it should be fairly
shared by a wider project team.
material
A last resort is to try and forecast the
impact
to cover with a
contingency in the bid. The downside is
massive as realized with supply shocks
of the last few years, and the upside
quite small, so proceed with caution.
The contractor team is managing
plenty of risks already for the project
stakeholders, and commodity pricing is
an entirely different industry!
Owners and project
delivery teams are
realizing that it is unfair to
burden the contractors
with this risk ...
DEEP FOUNDATIONS * MAY/JUNE 2024 * 119
RISK CORNER
May/June 2024

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