Civil Engineering Reference
In-Depth Information
assuming, of course, that everything else remains unchanged. The
market price occurs where the demand line and supply line intersect,
which matches the quantity on offer with the quantity demanded. Prior
to any engagement with the supply market, this occurs at intersection
1 in Figure 2.2, where the demand for construction meets the 'supply
ex ante
' line.
Each supply line represents a given set of circumstances and condi-
tions, including a given number of potential tenderers and their level of
interest in participating in a project. The aim of the procurement team
is to increase both the pool of fi rms wishing to compete for the work,
and their appetite for the work. Achieving these objectives shifts the
whole supply curve to the right, which implies that, at the same price,
more fi rms are willing and able to offer their services to the client.
This occurs at point 2 in Figure 2.1, which identifi es the new hypotheti-
cal quantity all fi rms in total would be willing and able to offer for
sale to the client - an increase from Q
1
to Q
2
. An increase of supply
would occur at every price, if the procurement team is successful in its
efforts to attract contractors and suppliers. The aim of the procurement
team is therefore to shift the supply line from the position before
the client engages with the supply market to the supply line
ex post
engagement.
As a result, the client now has more fi rms competing for the same
amount of work and a surplus or excess supply has been created. The
surplus capacity now on offer puts a downward pressure on price to
point 3 in Figure 2.1. By increasing the appetite of fi rms to participate
in a project, the client acquires the services of contractors at a lower
price than would otherwise have occurred.
Although this basic approach fi ts well with the tactics of procurement
engagement strategy, a number of non-theoretical issues are raised. The
client has a given project and requirement and the quantity of services
cannot be varied easily. In economic parlance, demand is said to be
inelastic or relatively invariable, regardless of price.
Moreover, the actual process of bidding for work is not a marketplace
as much as an auction room, with one buyer and several suppliers com-
peting on, among other things, price to win the tender. Often this leads
to a concentration on price, and the lowest tender price is frequently
the winning criterion. On major projects such as the Olympic Games
and Crossrail, where public interest is also of major importance, other
selection criteria need to be considered, and both of these programmes
applied greater weight to quality elements than they did to pricing alone.
