Procuring major capital projects never seems to get any easier; global construction supply chains have been hindered by COVID, the war in Ukraine and major contractor insolvencies, including ISG and Carillion; in the UK specifically, the market has also been acutely affected by post-Grenfell insurance attitudes. Collectively, this heightened focus on risk has resulted in greater sophistication and corresponding pushback from the supply chain. There is however a positive outcome: in explicitly articulating and managing risk, contractors are increasingly speaking in terms that are readily recognisable to investors. The danger arises when investors are not equally fluent in matters that are within the contractor’s domain.

Any party investing in value-add or opportunistic real estate must understand how the market operates, including available procurement frameworks, the strengths and weaknesses of each, and the importance of having a robust and tested procurement strategy - including options to pivot or abort if necessary.

A lack of understanding of the procurement process can leave substantial value on the table. In some cases, it can potentially break a deal or prevent it from getting through underwriting in the first place.

Particular caution should be taken regarding the perceived merits of the very common two-stage tender process. Its advocates, and many within the contracting community, may wish to shout about its collaborative, partnership-like philosophy. However, in recent years many investors have discovered that such a process does not always work as intended. Our observation over the past 18 months suggests that this procurement route is really being tested by an increase in aborted tenders.

The issues can arise when a transaction is underwritten based on a quantity surveyor’s cost plan, which is subsequently accepted by the contractor during the first stage of the process. This can leave the investor effectively relying on a single contractor, with pricing at the behest of the supply chain. By that point, there is often a high probability that investors will remain committed to the scheme and their reputation, even where the emerging price no longer reflects the basis on which the deal was originally underwritten.

However, investors must be prepared to walk away where the deal is no longer as originally described.

The problem is not necessarily the two-stage framework itself. The framework has a solid philosophy: we have experience using it and may well do so again in the future. However, the way its respective stage KPIs are perceived, the terminology adopted, and the level of rigour applied to them, can lead investors into a false sense of security about what the work-in-progress price actually represents.

Investors must remember that, until a competitive tender process has taken place for the full scope of capital works, with appropriate engagement across the various tiers of the supply chain -much later than some expect in the process-, any suggestion that the price has been “fixed” remains, to a greater or lesser extent, an estimate rather than a certainty.

In a two-stage process, the cost plan established during the first stage sets the floor, and not the ceiling, in terms of price. Investors should therefore have a suitable contingency budget and a robust quantity surveying team: otherwise, they run the risk of the deal collapsing at the back end of the second stage.

For a two-stage process to truly work, the client must be certain on the brief. The design quality at the time of procurement must be robust and audited, and the cost consultants' cost plan must be rigorously challenged before anything leaves the door.

Buyer Beware.