Rising Prices, Supply Chain Bottlenecks, and Material Shortages – the Importance of Procurement Strategy in Today’s Environment
In an environment of rising prices, supply chain bottlenecks, and material shortages, implementing an efficient procurement strategy on your construction project is more important than ever. Procurement strategies that worked in the past will likely not work now, nor will they likely work in the future. Strategies of the past include, amongst others, relying on a single supplier or small group of suppliers, sourcing materials from overseas, and just-in-time delivery. In times of uncertainty, projects and companies can take several actions to mitigate the risks of procurement-related delays and disruptions.
Strengthen the Supply Base
Recent events have taught many companies that they have been too reliant on one supplier, one region, or one location. Companies should be looking to strengthen and broaden their supplier base by:
- Diversifying the supply chain to work with more suppliers
- Reshoring or nearshoring the supply base to mitigate delays resulting from supply chain bottlenecks
- Engaging with large-, medium-, and smaller-sized suppliers to understand the benefits and risks of working with each
- Collaborating with suppliers to address challenges and put adequate contingencies in place
- Identifying alternative sourcing strategies or alternative materials
- Considering prefabricated systems and components to save time and help mitigate potential labor shortages
Proactive steps that can ensure sufficient liquidity to weather uncertain times include:
- Improving payment terms: Negotiate more favorable terms with vendors through the procurement process
- Prioritizing spending: Consider whether each expenditure is necessary for the project to progress, or if it can be minimized or delayed
- Establishing unit rates for material pricing
- Early payment milestones: Including early payment milestones in the contract can help mitigate potential cashflow problems
- Communicating: Developing open lines of communication between owner, contractor, and suppliers can help identify any liquidity or cash flow problems early on
Align the Procurement Schedule with the Owner’s Priorities
Managing lead times to avoid delays and cost overruns is a challenge for any construction project. Key to mitigating material and scheduling risks is to involve the owner early in the procurement planning, when schedules are being set. Early owner engagement can include:
- Determining the priority, budget or schedule: Aligning on the priority of either budget or schedule is crucial for a project’s success and will allow for an appropriate procurement strategy
- Identifying long lead items and ensuring financial commitments are in place
- Identifying items that require advanced planning and ensuring engineering schedules are aligned with manufacturing windows to avoid any delays due to late equipment delivery
- Staying informed of materials that are in short supply
- Ensuring transparency by establishing agreements that are fair to all parties involved: If the supplier understands that the owner shares the material escalation risks, the supplier is more likely to give a fair market price instead of an inflated number
Build Loyalty with Multiple Subcontractors and Suppliers
Establishing a broad set of trusted subcontractors and suppliers allows for earlier engagement and results that can help control costs, implement design changes when necessary, and limit exposure to changing lead times and/or limited material availability.
Implement the Appropriate Technologies
Technology enables contractors to build faster and safer with fewer surprises. Technology can also be leveraged to modify designs and incorporate the most appropriate and cost-effective materials available. This can include:
- 3D model-based estimating to establish more accurate quantities
- Integrating business systems through an Enterprise Resource Planning (ERP) system
Procurement-related disruptions and cost overruns are a common occurrence on many large-scale construction projects. Especially in an uncertain economic environment, companies and projects should examine and adjust their procurement and contracting strategies to ensure greater resilience and mitigate the risks of procurement-related disruptions.
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