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HomeMy WebLinkAboutFIN-2022-149 - Temporary Measures - Supply Chain and Inflationary TrendsStaff Report r NJ :R Financia( Services Department www.kitchener.ca REPORT TO: Committee of the Whole DATE OF MEETING: March 21, 2022 SUBMITTED BY: Ryan Scott, Manager, Procurement, 519-741-2200 ext. 7214 PREPARED BY: Debbie Andrade, Manager, Budgets, 519-741-2200 ext. 7114 Ryan Scott, Manager, Procurement, 519-741-2200 ext. 7214 WARD(S) INVOLVED: N/A DATE OF REPORT: February 28, 2022 REPORT NO.: FIN -2022-149 SUBJECT: Temporary Measures — Supply Chain and Inflationary Trends RECOMMENDATION: That Council approve the following temporary measures for the remainder of 2022 in response to current supply chain and inflation related trends: • Staff be delegated authority to award Solicitations that are within the Council Approved Budget, thereby reducing the overall timing of awards and increasing cost certainty for vendors; and • Staff be directed to prioritize capital projects where needed, and defer projects where appropriate to address anticipated capital project shortfalls; and • Staff be authorized to transfer funds of up to 20% between projects or from appropriate capital reserves to allow high priority projects to still proceed; and • Staff be delegated authority to extend existing agreements by one year to maintain continuity of operations and ensure a continuous supply of goods or services. REPORT HIGHLIGHTS: • The recommendations in this report address systematic issues (supply chain, inflation, labour) impacting the successful procurement of goods and services required for City operations and capital projects; • The increased project costs are not an anomaly and are being experienced by municipal counterparts in the Region and across Ontario; • Temporary measures are required to streamline administrative tasks from both the purchasing bylaw and the budget control bylaw to mitigate exposure and provide a sense of urgency to the procurement; *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. Page 47 of 86 • Information on projects awarded through these temporary measures will be captured and reported back to Council; • This report supports the delivery of core services. BACKGROUND: The COVID-19 pandemic has caused international supply chain disruptions, including temporary closures to production factories, and closures/backlogs at key global shipping ports. The rapid rebound in demand for skilled labour, raw materials, intermediate goods and various logistics services has been hampered by limited supply. This has hit several markets and is translating into exceptional price increases, supply shortages and late deliveries. In addition, the supply chain has been further impacted by a number of other disruptions such as the Freedom Convoy border blockages which greatly impacted the automotive industry, the extreme flooding in British Columbia which washed out and damaged railways and highways cutting off the Port of Vancouver from the rest of the country, and now the Russian invasion on Ukraine which is mostly impacting the cost of both oil and gas adding to the sharp increase to the inflation rate. The effects of the global economy and the strain on the supply chain and labour resources is likely to continue for the remainder of the year and into 2023 and 2024. The higher than typical rise in the inflation rate is also expected to remain beyond 2022. City projects are being directly impacted by these shortages with increased project costs in the range of 10% - 50% higher across the board. The City's 2022 approved funding is insufficient for many of the projects moving forward. The recommendations in this report are to address the risks and pressures for 2022. Staff will look towards implementing additional measures beyond 2022 as well as adjust budgets in the 2023 budget process. REPORT: Economic Outlook In Canada, the COVID-19 pandemic appears to be largely under control for the moment. Despite this positive news the Canadian economy is still facing the adverse consequences of the pandemic, which will continue well into 2022 and create only moderate growth in the country. The Canadian economy is expected to continue to grow, but the gains will be more modest than could be expected at this point in the business cycle.' In addition to the ongoing effects of the pandemic on the global economy, there are several other factors contributing to the continued supply chain issues and rising inflation costs. The compounding effects of these global crises are making it difficult to predict when the economy might see some positive news. The recent Freedom Convoy border blockades have already inflicted significant economic damage on both the U.S. and Canada, weakening supply chains 2022 Economic Outlook for Canada I BDC.ca Page 48 of 86 already hurt by the pandemic. Traffic on the Ambassador Bridge, for example, accounts for a quarter of all cross-border trade between the U.S. and Canada — with $360 million in trade per day, according to Reuters2. The Freedom Convoy protests severely impacted the automotive industry and the supply of automotive parts as well as critical industrial components that fuel the economy and support critical infrastructure. The extreme flooding in British Columbia which washed out and damaged railways and highways cutting off the Port of Vancouver from the rest of the country also impacted the supply of essential goods and supplies. Finally, the recent Russian invasion on Ukraine is driving up the price of oil and gas as Russia is one of the world's largest producers of both oil and gas. This could have prolonged impacts on the global economy and result in higher inflation rates. Bank of Canada - Inflation Inflation is a growing concern as CPI inflation for Ontario in January 2022 was 5.7%. Prices for many goods and services are rising quickly and the prices for food, gasoline and housing are rising faster than usual. Global supply chain disruptions, weather-related increases in agricultural prices and high energy prices have put upward pressure on inflation in Canada, and that is expected to continue in the months ahead. These pressures should ease in the second half of 2022, and inflation is forecasted to decline relatively quickly to around 3% by year end. Further out, it is expected that demand will moderate, and supply will increase as productivity improves. This will ease price pressures and bring inflation gradually back close to the 2% target over 2023 and 2024. There is some uncertainty about how quickly inflation will come down because no one has experienced a pandemic like this in recent history. As the pandemic fades, conditions will normalize, and inflation will come down. However, with Canadian labour markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target.3 Cost Drivers The pandemic has presented significant challenges to accurately estimate costs for goods, services and construction. The main factors that have been driving the unprecedented increase in these costs are described below: 1. Supply & Demand: Pricing is highly sensitive to the forces of supply and demand. There is not an abundant level of supply and the demand is high, which equates to price increases. 2. Backlog: Backlog is the amount of work currently on the books. When there is a high volume of available projects it allows companies to charge premiums for their work. 3. Labour Costs: Service and construction are labour intensive. Because of this, a large portion of costs are determined by labour expenses. The current shortage in skilled labour increases wage costs. 'Freedom Convoy' trucker protests worsened U.S. supply chain issues (cnbc.com) 3 Monetary Report Press Conference Opening Statement - Bank of Canada Page 49 of 86 4. Commodity Pricing: Oil, lumber, steel and copper commodity prices - the raw materials for regular goods as well as construction materials - are at an all-time high. This results in higher supply and shipping costs. 5. Local Market Disruption: The Golden Triangle is rapidly expanding which strengthens the risks described above. Increased competition for a limited pool of labour and materials increases costs. 6. Global Market Disruption: Supply chain delays from blockades, protests, labour shortages, and global uncertainty result in higher costs. City Procurements Over the past few weeks, staff from the Financial Services Department have facilitated meetings with each of the City divisions who procure goods, services and construction contracts. Through these discussions several concerns were heard consistently across the divisions related to risks associated with pricing increases, resource shortages, and supply chain issues. In some cases, the City is seeing project costs 10% - 50% higher then approved budgets. This will likely continue for the remainder of the year and into 2023 and 2024. Fleet Facilities Management Kitchener Utilities Trends by Division • Number of bidders has decreased o Sometimes getting no bids, or only 1-2 responses • Overall, bids are coming in up to 50% overbudget • Delivery of equipment 12-18 months from order • Overall, projects are coming in up to 50% overbudget • Overall, low to moderate number of responses to bids • Projects up to 30% overbudget • Supply of goods (e.g. meters, water heaters) are required to continue to offer services to the public Parks & • Overall, projects are coming in up to 30% overbudget Cemeteries Sanitary and . Overall, projects are coming in up to 30% overbudget Stormwater Engineering • Overall, strong number of responses to bids, projects are coming in within budget, or close to budget • Large contractor base who prioritizes this work for the City • Shielded in some regards due to the type of construction With responses coming in over budget, staff have been challenged to successfully procure and award projects in a timely fashion. Staff believe this trend will more prominently impacl procurements in the coming months and likely into 2023. Page 50 of 86 Page 51 of 86 Recommended Temporary Measures As all municipalities are experiencing this in the short term, the recommended path to proceed forward is to create further efficiencies in the procurement process, which will allow the City to provide appropriate responsiveness and timely award of procurements and have an appropriate funding structure in place to cover off projects that are deemed priority. To achieve this, the following recommendations are being made: 1) Reduce overall timing of awards and increase cost certainty for vendors by providing staff with delegated authority in 2022 to award Solicitations that are within the Council Approved Budget. The Purchasing By-law is prescriptive on the scenarios which require a recommendation to be approved by Council, they are: • Consulting Services — greater than $100,000; • Non -Standard Procurement —greater than $100,000; • Goods/Services/Construction between $100,000 and $750,000 if o The value of the Bid being recommended for award including any contingency allowance are in excess of the Council approved budget; o The project is not specifically identified within the Council approved budget; o There are other orders of government or granting agencies that require Council approval; or o Only one bid was received in response to the solicitation • Goods/Services/Construction - greater than $750,000 The current by-law requires Council approval for all consulting contracts greater than $100K and all goods/service and construction contracts over $750K. This results in an average time to award the contract of 20-60 days after a bid has closed (best practice is 2-21 days). As an example, in the City's Request for Tender (RFT) process, Contractors are required to hold pricing for 90 days. Because of increased cost drivers, this is proving difficult for contractors as their vendors are only holding pricing for up to 30 days. By removing the need to bring projects already approved by Council through the budget process back to Council for award, this will reduce overall timing of awards and increase cost certainty which will benefit both the City and the vendors. The shorter time period is appreciated by the vendor community, as it would allow their resources to provide potentially better pricing with the shorter window and be able to prioritize other opportunities. The efficiencies will provide an opportunity to award the maximum number of projects within approved funding. 2) Address anticipated Capital Project shortfalls in 2022 by directing staff to prioritize capital projects where needed, defer projects where appropriate, and authorize the transfer of funds up to 20% between department projects or from appropriate capital reserves, to allow high priority projects to still proceed. In accordance with the budget control bylaw, the practice of delegated authority to transfer money is limited. Any capital project for which anticipated expenditures will exceed the funding available by an amount greater than 10% of the original budget or $250,000 requires Council Page 52 of 86 approval. This practice requires a separate report to Council outlining the amount and reason for the anticipated over -expenditure. In 2022, the reason for anticipated over -expenditure is common among all divisions as seen with the recent supply chain issues and increased price of goods and inflationary trends. The intent of this recommendation is to remove the requirement to come to Council if a recommended award is within 20% of the approved budget, and a funding source is identified within the Department to cover the shortfall. This will create efficiencies and allow timely awards on priority projects to secure contracts and pricing. When a tender or RFP comes in over budget, staff identify other potential funding sources as options to fund the overage. This includes reviewing capital projects within their department and determining if there is funding that could be transferred from existing capital projects that are near completion. This process is often referred to as capital closeouts and typically happens at the end of the year, but can also occur at any point throughout the year when a project approaches completion. This would be the first option that Departments would consider. A second option is for Departments to consider transferring funding from projects that have not been tendered yet, where the timing of the work is expected to be delayed, and where there is an opportunity to re -budget the project through the next budget cycle This could mean that projects expected to proceed in 2022 may be deferred until 2023 or later. For example, if a department had 5 projects that it was planning to proceed with in 2022, it may mean only proceeding with 4 and transferring funding from the lowest priority project to help fund the other four. The project that didn't proceed in 2022 would then be prioritized against other budget requests in 2023. Finally, some departments like Facilities Management, have dedicated general provision accounts (e.g. State of Good Repair) or reserves to support their capital program. These sources may also be used to cover budgets overages if a project is still determined to be a high priority to proceed. As outlined in the budget control policy, any transfer from reserves would require the approval of the Chief Financial Officer, if it was determined that other department specific funding sources are not available. Departments regularly prioritize capital work based on the resource availability and timing of the work/project schedule. They also consider other important criteria to prioritize projects within their department including: • Whether the project is grant funded with specific reporting/ completion date requirements • Specific work that is identified through asset management plans • Condition assessment data that supports urgent repair/replacement needs • Integrated project timelines with other work identified in the capital forecast Any projects where funds are transferred based on this recommendation would be highlighted for Council through the regular quarterly solicitation award report. 3) Maintain continuity of operations by providing staff with delegated authority in 2022 to extend existing agreements by one year to ensure a continuous supply of goods or services. Page 53 of 86 The intent of this recommendation is to extend existing agreements where a) the goods or service are in short supply, b) competition currently does not exist, or c) production capacity does not exist until 2023. These supply agreements are deemed critical to providing continued service to the public. The best method to mitigate the City's risk is to continue to partner with existing vendors who have capacity already allocated and available for the City. This will eliminate the need to bring forward non-standard procurement recommendations that fall within this scope. STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. FINANCIAL IMPLICATIONS: The recommendation in this report has no impact on the approved 2022 budget. Departments were asked to review existing capital balances and consider options of deferring/closing out capital projects to fund potential overages on projects moving ahead in 2022 and are deemed priority. Where departments are unable to fund their overages through the deferral or closure of existing capital projects or the projects and are above the recommended 20% of the original Council approved budget as outlined in this report, a separate report will come forward to Council. These temporary measures will be re-evaluated later in 2022, and 2023 budgets will be adjusted accordingly through the annual budget process. COMMUNITY ENGAGEMENT: INFORM — This report has been posted to the City's website with the agenda in advance of the council / committee meeting. PREVIOUS REPORTS/AUTHORITIES: There are no previous reports/authorities related to this matter. APPROVED BY: Jonathan Lautenbach, Chief Financial Officer, Financial Services Department Page 54 of 86