Civil Engineering Reference
In-Depth Information
If this demand is fragmented between many separate contractors,
prices can rise as shortages appear. However, by consolidating the same
amount of demand into one purchase order, suppliers may feel obliged
to offer discounts to the purchaser rather than lose the sale to their
competitors. Indeed, it may well be possible to play one supplier off
against the others to reduce the price charged. This is a typical situation,
where the market is monopsonistic and a large single purchaser is in a
position to drive down prices. This is the effect of market leverage or
negotiating strength. However, if the aggregated demand exceeds the
capacity of fi rms, it can overheat demand and cause prices to rise or
delays to the programme. Market soundings and engagement exercises
should reveal these issues and make the purchaser aware of the possibil-
ity of companies exaggerating their capacity and capability to meet a
large increase in demand.
Although the ODA was a client delivering a large infrastructure pro-
gramme and the leverage may have been considerable, the bargaining
strength of the ODA was not necessarily entirely based on the size
of its demand. When bidding for construction work, contractors would
also have considered a number of other factors in addition to the
standard factors of profi t and turnover. These other factors include
prestige, marketing opportunities, reputation and existing project
portfolios.
The client's status in the market is also determined by the programme
demand it creates in relation to the overall sector capacity and whether
that demand is continuous over a period of years or is confi ned to a
discrete period and represents a one-off demand. Some component quan-
tities may appear large in a programme sense, but taking the construc-
tion sector as a whole, or even within a region, these quantities may be
relatively small. For example, Network Rail has a high level of demand
for steel rail and has continued to do so over many years, while the ODA
exists as an entity only until its objectives are achieved, at which point
it ceases to trade and no longer creates any demand. The market
context determines the leverage of the client as much as do the size and
importance of the client.
In addition, where common subcontractors or suppliers are engaged
by a number of tier 1 contractors on separate projects, it is important
that the client has visibility of the supply chain's capacity across these
separate projects within their programme, in order to avoid overextend-
ing the demand facing any one tier 2 contractor. Generally, tier 1 con-
tractors will not necessarily have detailed knowledge of supply chains,
