The Hidden Risks of Client-Supplied or Free-Issue Materials in Capital Projects

In capital works—particularly in sectors like oil & gas and mining—the use of client-supplied or “free-issue” materials and equipment is a well-established practice. These industries often have dedicated procurement teams, robust systems, and long-standing supplier relationships that make this approach viable. However, outside of these contexts, the risks can be significant and are often underestimated

Why Clients Choose Free-Issue Materials

Clients may opt to supply materials directly to reduce costs, avoid contractor margins, or leverage existing agreements with vendors. In some cases, this makes strategic sense—especially when the project involves very specific or specialised items that are difficult to source or specify externally. Examples include custom-engineered pumps, precision valves, or bespoke tanks designed for unique operating conditions. These components often require deep technical knowledge and long-term supplier relationships that only the client possesses, making direct procurement the most practical and reliable option.

At the other end of the spectrum, when a client has total control over the supply chain—managing procurement, logistics, and quality assurance—the risks are significantly reduced. This level of control is typically found in large organisations with mature systems and experienced teams.

Real-World Examples from Illanco

Success Story: Specialist Pump for a Resources Client

Illanco supported a major resources client who required a multi-million dollar specialist pump. The client had worked with the European supplier since project inception and had the internal expertise to specify and design the equipment—arguably better than any external party. Logistics were managed in-house as part of their business-as-usual operations. The pump was delivered on time and installed seamlessly by the contractor. This was part of a larger capital project, not a standalone operation, and demonstrated how client-supplied equipment can work well when the right systems and relationships are in place.

Cautionary Tale: Miscommunication and Coating Failure

In contrast, Illanco was engaged to assist a client dealing with the fallout from a procurement decision made outside the project team—at CFO level. Mechanical components were imported from Europe, but were actually manufactured in Asia and supplied to the contractor. Due to poor governance and miscommunication, the components arrived with an incorrect coating—reactive and unsuitable for the application. The issue was only discovered during commissioning. Illanco worked with both the client and contractor to develop a remediation plan. However, strained relationships and adjacent disputes meant the contractor had little incentive to act swiftly. The client faced potentially business-damaging delays. Illanco recommended an incentive-based agreement tied to time, and suggested settling simpler parts of the contractor’s outstanding claim as a gesture of good faith. This approach proved critical and largely successful. The root cause lay in the risks not being fully understood when the procurement strategy was chosen—likely due to the client’s usual supply chain being simpler.

Smarter Alternatives to Consider

To balance cost efficiency with project integrity, clients and contractors can explore more collaborative procurement models:

• Nominated or Novated Suppliers – Contractors procure from client-preferred vendors under agreed terms.

• Negotiated Pricing – Jointly agreed pricing structures that reduce margins without shifting procurement responsibility.

• Partial Open-Book Arrangements – Transparent cost-sharing models that foster trust and alignment.

Ultimately, the decision to use client-supplied materials should be based on a clear understanding of the risks, the client’s capacity to manage them, and the nature of the project.