Purchasing And Procurement In The Construction Industry Construction Essay

In this ever changing world that has become so competitive that the expectations in the construction industry regarding deliverables, cost, time and quality have made companies shift to more robust and competitive operational strategies. Other industries have successfully implemented new and improved strategy but the construction industry still has to follow suit. One of the major factors that are identified in the construction industry is the rather slow changing procurement chain management system. The current strategies used for procurement do not live up to the market requirements and rather is stifling the growth of this particular industry. Understanding these various models are being implemented throughout the industry which will have a significant impact on the growth as well as improve productivity to help this industry sustain the drastic economic changes.

Historically, the sourcing of subcontracting services was the most neglected element in the construction process. Only when the cost of materials and the subcontracting increased did management investigate alternative methods to planning and control. Labor was the focus since this industry is labor intense and more emphasis was given to the cost of labor. Firms also started investing heavily into technology and technology related products.

The traditional view of purchasing and sourcing management as a clerical function has been negated and emerged as a viable and profitable function more than any other functions in the construction industry. The lifecycle of a typical construction project consists of the following stages,

The construction life cycle stages are mutually exclusive or independent of each other. Many of these stages occur concurrently. Depending on the size of the organization the supply sourcing maybe implemented in varying degree of ownership. Regardless of the size of the company ownership in the supply souring function must be well defined.

The supply sourcing must be carried out according to the specification of the projects, budgetary and scheduling constraints. Supply sourcing function involves working with upstream and downstream relationships, inside and outside each organization. The supply sourcing process involves assisting the project manager with subcontracting services, bulk material and equipment requirements.

The construction manager or contractor coordinates the transformational process based on three basic criteria which is completing the project on time, making sure he/she sticks to the budget and delivered with an accepted level of quality.

Review of Existing Purchasing Options

In the construction sector, procurement has become difficult due to the different methods for acquisition of buildings and infrastructure. The main features of current procurement options are listed below. The section is divided into the various methods of contracting / funding, methods of selection and methods of payment.

Methods of contracting

General Contracting: design is done by independent consultants who are in direct contact with the client or designers who are part of the client organization. There is a separate contract for the construction of the project which is placed with a building contractor who sub-lets the elements of the work. Payment is done monthly based on the amount of work done.

Design and Build (pure): Design and Build (D&B) is the procurement system in which a single organization takes the responsibility and risks for both the design and construction phases. The client engages a building contractor who is responsible for the design and the construction. The method of payment is lump sum, payable in monthly installments.

Novated Design and Build: This is a variation of the pure D&B and is used when the client employs a design team for the early stages and once a building contractor is selected by tender the team is shifted to this builder. The advantage of such a system is that the original design is kept intact from the early stages and ultimately is passed on to the contractor.

Management Contracting: This type of system came into existence with the needs of developers to take more commercial risk on construction projects as compared to general contracting. The trend of building contractors to sub-let all the work resulted in the need to procure a project management and co-ordination input and also harness close relationship between client and contractor.

Construction Management: Effectively the same as management contracting, the only difference being that there is no general contractor, instead a series of direct contractual links between the client and the trade contractors. This makes the role of CM more like a consultant than a contractor.

Package Deals: This is a way of increasing the scope of the contractor. For large engineering projects like oil rigs, harbors and docks they are structures as Engineer, Procure and Construction. Under such an arrangement the EPC contractor takes the responsibility for carrying out all the design, construction and commissioning work so that the client only has to pay.

Systems Involving Service Agreements: sometimes organizations maybe contracted to provide other inputs. These include commissioning, operation and maintenance.

Collaborative working: Sometimes in projects various organizations come together to have a collaborative relationships. There is a lot that can be gained from such alliances and have success for both the project and the organization in the long run. The continual relationship building plays a crucial role in such circumstances. The trend towards long term arrangements is clear with strategies like framework agreements and serial or strategic partnering. Such alliances prove effective with the savings in costs of re-bidding, the prospects of continuous improvement and a predictable workflow.

Methods of selection

Long term or short term relations need to be formed to accomplish where there is a greater need on competition or cooperation. Levels of competition arise from open tendering to single negotiation. Open and selective tendering relies on price as their main criterion. Some clients adopt a more cooperative approach and favor negotiations where non-price plays a significant part. Two stage tendering is a hybrid approach that seeks to exploit the advantage of negotiations and competition. The appointment of a contractor takes two stages. Stage 1 is competitive and based on costs. Stage 2 is made after the completion of open book negotiations for the final price.

Methods of payment

Price-based systems: these include lump-sum arrangements that range from Guaranteed Maximum Price (GMP) to remeasurable contracts. GMP is used when contractors control the design and remeasurable contracts are characterized by the contract bill of quantities. In such contracts the amount of work is measured after it is finished with reference to the rates in the bills of quantities.

Cost-based systems: cost-based payment methods include cost-plus and target cost. Cost plus contracts removes the risk of variable production costs from the contractor, who is paid on the time spent and the materials used rather than sticking to the tendered price. Target cost contracts are used as an incentive to increase efficiency from the contractor. The costs are shared between the contractor and the employer. Even if the cost exceed the agreed target cost or in a situation where the costs are less than the target cost, it is shared between both parties.

Today’s Construction industry uses this particular model (Fig. 1) because the specialty contractor has been responsible for material procurement. In this model, the owner and the general contractor rely on the specialty contractor to procure all the equipment and material for the project. Owners use the SCPM over 80% of the time to procure build-to-order equipment and to procure commodity material over 90% of the time.

Majority of the material is transferred between manufacturers, manufacturing reps, distributors and specialty contractors. With this model the SC has reviews the design specifications and notifies the owner or GC of equipment or material incompatibility issues, design change recommendations or lower cost equipment and material substitutions. Once the design is confirmed the material orders flow from the SC to both distributor and manufacturer. The material and equipment then flow back to the SC at the jobsite.

Knowledge and service transfer in the SCPM model are between manufacturers, distributors and specialty contractors. The figure below illustrates the knowledge transfer between the parties involved.

This model is less common than SCPM in the construction industry. In this model the owners procure the material and equipment directly from the manufacturer or from a distr4ibutor. This is mainly used to remove transactional costs from the supply chain. This model is typically used about 10% of the time for the entirety of their equipment and material purchases. This model is particularly used for procurement of build-to-order materials than it is for commodity materials.

The transfers are directly between the owner and manufacturer. The owner has his own design team to procure the correct material and equipment. The input from a specialty contractor varies. The owner has a strong standing relation with individual specialty contractors and such cases the SC gives input about material to the owner. In this model the material is directly shipped to the jobsite and stored until installation.

The knowledge and service transfers in this model are very limited. Knowledge is primarily obtained from the owner’s past experience and through design specifications that were developed for previous projects.

This is the least commonly used purchasing model in the construction industry. In this model the owners commission the GC to procure material and equipment. In most cases the GC seeks to purchase all the material and equipment from the manufacturers directly. Most manufacturers are not set up to sell their products directly to customers and hence the GC has to go through the normal distribution channels. Only 2% of the time is this model used in the construction industry.

The transfers in this model occur between the GC, distributor and manufacturer or directly between the GC and manufacturer. The flow is such that once the order is given to the GC the GC purchases the material without the consultation of the SC. In this model the GC procures the material and equipment according to the specifications of the project.

The knowledge and service transfers in the GCPM are similar to the OPM model. The GC must depend on his own experience as well as details from the manufacturer and/or distributor in order to purchase the proper material. Knowledge from installation experience does not exist because the SC is not involved in the procurement process and the GC is not involved in the installation process.

Summary

The procurement process of the construction industry is complex and involves various amount and degree of procurement. Several untouched and untrained areas exist in the procurement process of construction. It stands that it is an important cog in the entire process of construction. Various avenues still exist and with careful study of internal process and finding a suitable fit so as to be effective and competitive is essential for the success of an organization in this industry. A huge potential exists in having a cost effective process that can make achieve acceptable levels of quality and on time delivery are the key elements to have a procurement process model.