Navigating construction supply chain challenges and risks
- Australian construction companies have been facing delayed deliveries, rising material costs, and quality issues, exacerbated by geopolitical tensions and reliance on limited suppliers
- Factors such as offshore manufacturing challenges, supply chain network breakdowns and reliance on fixed-term contracts have contributed to supply chain vulnerabilities
- Effective risk management strategies include diversifying suppliers, establishing contingency plans, building quality relationships, and conducting frequent quality reviews to manage disruptions and maintain project timelines
In the Australian construction sector, a quality, efficient, and reliable supply chain is essential for projects to run on time and within budget.
In the current climate however, there are many challenges affecting the reliability of supply chains. Availability concerns that started during COVID-19 have been exacerbated by rising costs, concerns over quality, and ongoing geopolitical tensions.
For those operating within the construction sector, it is essential to understand the challenges impacting the supply chain, and the steps that can be taken to reduce and mitigate these risks.
Reasons for the vulnerability of supply chains
QBE’s Australian Construction Sector Outlook details the following factors that have contributed to the ongoing vulnerability of supply chains in the construction sector:1
Geopolitical tensions
International conflicts and geopolitical unease in regions including Ukraine and the Middle East have disrupted the steady maritime flow of supplies due to sanctions, increased tariffs, and higher freight costs.
This has extended procurement times for construction materials as shipping routes are redirected and alternative suppliers are sought. With ongoing uncertainty, global supply chain disruptions may persist and continue to put pressure on project budgets and timelines.
Reliance on offshore manufacturing
The logistical challenges of sourcing materials offshore have driven up costs for builders and contractors, a trend that is predicted to continue. The combination of higher freight charges and extended delivery times continues to strain budgets and complicate project planning, highlighting the need for effective supply chain management strategies.
Craig Rogers, Manager, Risk Engineering at QBE Australia Pacific, says it’s vital to adopt a broader, macro approach, that considers not only entire supply chains but also the availability and costs of individual products.
“There are many building component factories based overseas which were recently shut down. As a result, sourcing specific building products right now is difficult and costly, even when the overall volume of imports is relatively low.”
Breakdown of supply chain networks
The interconnected nature of suppliers means that issues within one part of the supply chain can quickly impact the entire network. Disruption from a primary supplier can spill over to affect secondary suppliers, subcontractors, and ultimately the project’s completion.
Matthew Boon, Head of Underwriting, Heavy Industries, QBE Australia Pacific, poses the scenario of a major supply business becoming insolvent.
“If a contractor lacks relationships with alternative suppliers, or if other suppliers aren’t adequately supported to grow their business and fill the gap, supplies could come to a halt,” he says.
“This would likely result in inflated costs, project delays, and a ripple effect impacting the industry for six to 12 months.”
Reliance on fixed-term contracts
Building and construction businesses in Australia have traditionally relied on fixed-term contracts that establish a set price for each project. However, delays in project completion and the rising costs of intermediate products can erode profit margins for industry operators.
These fixed-price agreements leave little room for flexibility, making it challenging for businesses to adapt to unforeseen expenses and extended timelines, ultimately putting financial pressure on contractors and impacting project viability.
Sustainability requirements
The Australian construction sector is transitioning to new building standards under the updated National Construction Code (NCC).2 As state governments roll-out implementation plans, businesses will need to be across regulatory amendments and policy announcements to ensure compliance as the standards evolve.
This focus on the environmental sustainability of new construction projects is also designed to improve occupant health and comfort and reduce energy costs, and will impact choices around housing design, construction materials used, as well as the types of appliances installed in homes.
How businesses can minimise supply chain risks
Investors and principals in the construction and building market are increasingly expecting that the impacts of supply chain disruptions should be predicted and managed.3
To navigate these challenges, construction businesses need to implement robust risk management strategies. This may involve contractors accepting a larger share of risk allocation and exploring alternative risk management strategies, such as the inclusion of clauses in contracts that allow for the sourcing and use of alternative materials when necessary.4
QBE’s Matt Boon and Craig Rogers share the following tips:
Diversify suppliers
Boon explains that many Australian builders and contractors have traditionally relied on the largest suppliers for materials. He believes, however, that it’s important to diversify.
“For effective risk management, contractors should engage multiple suppliers rather than reliance on one, even if using a single source offers cost efficiencies,” he says.
“Diversifying suppliers can help mitigate risks and create a more resilient supply chain.”
Establish contingencies
As well as not being reliant on one supplier, it’s critical to have backup suppliers and alternative procurement strategies in place. By developing contingency plans, businesses can quickly pivot to alternative suppliers or strategies in the event of a disruption, keeping the project on track.
According to Rogers, this could involve adopting a local focus. “If a country faces sanctions, for example, and the supply of a key component dries up, it can have a significant impact.
“The demand then shifts to other large offshore suppliers, and if a conflict were to arise in this new location, the issue would persist. Therefore, it’s crucial not just to move the problem elsewhere but to diversify domestically.”
Conduct regular reviews and audits
Frequent quality reviews and performance audits can help ensure that standards are consistently met, reducing the likelihood of project delays and rework due to substandard materials. For larger businesses, increased attention to sustainability requirements will factor into this.
“You need to consider the quality of the product, which is crucial in the heavily regulated construction industry,” says Rogers.
“Ensuring that materials have the proper certifications and that those certifications are valid is a key challenge in supply chain management.”
Build quality relationships
Understanding and having alignment on standards, certifications and quality up front can lead to strong, transparent, and mutually beneficial relationships with suppliers. Reliable suppliers are more likely to prioritise deliveries and maintain higher quality standards when a strong relationship is in place.
A quick guide to managing supply chain risks:
- Diversify suppliers: Spread the risks by engaging multiple suppliers both overseas and locally.
- Make contingency plans: Develop backup plans and alternative procurement strategies by nurturing diverse relationships.
- Undertake quality reviews: Conduct frequent material quality and supplier performance assessments to ensure the timely fulfilment of contracts.
- Strengthen relationships: Foster robust relationships with key suppliers for better reliability and support.
- Assess your cover: to ensure your policies adequately cover supply chain disruptions and potential project delays.
Build a resilient future: Download the Australian Construction Sector Outlook report
For more in-depth insights on managing supply chain risks in the construction sector, read our article on QBE’s Australian Construction Sector Outlook report.
1 Australian Construction Sector Outlook, QBE Insurance, 2024
2 Australian Building Codes Board, National Construction Code
3 Supply Chain Challenges In Construction & Infrastructure, McInnes Wilson, August 2023
4 Supply Chain Challenges In Construction & Infrastructure, McInnes Wilson, August 2023
