Practical Methods to Reduce Supply Chain Risks

For the last few months, the overriding central topic of discussion for the OGCA, our members, industry stakeholders, the media and especially the buyers of construction, has been the subject of price volatility and supply chain risks.

The impetus for these sudden and erratic spikes in material costs has been linked directly and indirectly to COVID-19 and the difficulties that have manifested in both the production and distribution of goods used in construction. Although we do not see a clear signal that the price irregularities will quickly dissipate, the OGCA has been very active on behalf of our members to minimize the impacts.I would like to share with you two such initiatives.

Understand that, at the onset of the pandemic, not many in construction were able to deduce that COVID-19 would have such an impact on the overall flow of materials throughout construction nor its profound impact globally. Had we been able to have this foresight, then the subsequent tender and contract language would have been amended prior to this crisis occurring. And clearly, this language would have been reflective of our current situation at a time when it wouldn’t have been contentious.

COVID-19 caused the widespread and repeated closures of steel, lumber and gypsum plants around the world. And you don’t even need to look globally to see the level and extent of the disruptions to understand the implications. Outbreaks would shut down these plants for weeks at a time and they would then return to work for a short period, followed by yet another reported outbreak, which would lead to yet another mandated closure. It doesn’t take much to see the compounding effect of the stopping and re-starting of the productions nor would it be difficult to then see the exponential effects on these commodities over a global plane.

Unfortunately, we do not have the luxury of going back in time. So, we must deal with this situation as best as possible now, and to date, the OGCA has had a positive impact on the direction of procurement.

When faced with out-of-control cost fluctuations, what does one try to do? One tries to regain control; grab ahold of the steering wheel and correct the direction of the vessel towards safe waters. But this is always easier in concept than it is in delivery.

The OGCA found it easier to correct any potential issues arising prior to a tender being awarded. It was actually the timing of the tender award that the OGCA concentrated upon to assist in the adjustment and try to regain said control.

As most know, subtrades were not and are not providing secure pricing on pending work for a period greater than fourteen (14) days at the longest and are usually only securing their pricing for forty-eight (48) hours. With this in mind, the OGCA systematically communicated to all the buyers of construction through direct letters, municipal organizations and the media to curtail their timelines of tender award to a maximum of thirty (30) days.

Fortunately for us, most buyers of construction understood that the OGCA was actually attempting to reestablish equilibrium and responded positively. Only a select few actually reduced their timelines to thirty (30) days, but a large percentage returned to sixty (60) days. This may not be seen as a win for some, but faced with 120-day, 150-day and 180-day tender award closings, sixty days is a fabulous victory. And slowly, the ship starts to correct its trajectory.

Additionally, the OGCA has concentrated our efforts on escalation language that can be included in a pending tender or inserted via negotiation into an existing contract to stave off the effects of price fluctuations.

An escalation clause is a contract provision that allows for adjustments in costs for price fluctuations in the costs of raw materials or other supply chain related issues. This clause shifts the burden for increasing supply chain costs from the general contractor onto the buyer of construction. The only issue is the willingness of the buyer of construction to insert such a clause into their tenders and contracts. Overall, owners should include these provisions since, by doing so, it allows contractors the confidence to bid a project knowing that the major uncertainty has been addressed and hence more contractors will bid.

The OGCA is working diligently with our APP partners at McMillan LLP to have an OGCA approved escalation clause shortly. Once approved, this clause will be shared with all OGCA members as a further means to address the current volatile supply chain.

I believe that these two efforts – the shortening of award timelines in tenders and the inclusion of escalation clauses in contracts – will effectively correct this current uncertainty. And yes, those that have current contracts will also benefit from the inclusion of the escalation clause into an existing contract, but as I noted above, that is directly related to the willingness of the owner to allow for any such insertion.

The OGCA greatly appreciates the willingness of our members to highlight all of the timeline award matters that were brought forward and to have the OGCA speak on behalf of the members to correct these issues. Once we have the escalation clauses completed, then we will once again ask our members to bring forth tenders and contract language where the OGCA can be of assistance.

Should anyone want to discuss the reduction of timelines for tender awards or escalation clauses or if you require any assistance from the OGCA, please contact me directly at giovanni@ogca.ca or via phone at 905.671.3969.