The construction industry is under the tremendous burden of reducing costs. The private sector is experiencing a liquidity crunch. To add to its woes are lower profit margins due to increased cost, new regulations, and growing competition; as a result, construction companies are looking to chase prices in their capital projects.
The struggle with cost reduction while the prices of building materials skyrocket.
What makes this cost quest all the more challenging is the industry's structural deficiencies, including unequal risk allocation, delay in payments, scope changes, and overruns. The COVID-19 eclipse and other regional factors such as stress on contract prices, working capital, and cash flow further intensify its effect.
Hence, the question is, what are the various challenges construction companies face and what procurement can do to help them overcome these challenges and remain competitive and profitable while driving value?
Common Challenges in Construction Procurement
The construction industry has undergone significant changes in recent times. Techniques are getting more sophisticated and efficient, in addition to materials becoming extra robust and durable. On the flip side, complexity is also surging. New and updated legal standards, requirements, environmental concerns, and other systematic challenges put pressure on the current framework. Construction projects are also gradually increasing in size and scope, adding even more complexity to the process.
Here are some of the most common procurement challenges we observe across construction companies.
Spend Transparency and Visibility
Although this might sound obvious for some of you, many companies do not have the full spend overview across the business or group. Consolidating procurement data across numerous organizations, ERP-solutions, and data sources is vital for facilitating transparency and visibility. A spend management solution, functioning as a single source of truth, provides procurement and business stakeholders with all the right data at the right time.
The accuracy of data is an essential factor when it comes to the decision-making process. For construction companies, poor-quality procurement data might obstruct more informed decisions. However, using poor-quality data as an excuse to do nothing will only take you so far.
Unused Data Will Always Be Bad Data
Identifying data deficiencies through procurement analytics could be a key output for initiating systematic measures for improving your data quality. Data cleaning capabilities will also help mitigate the problem and improve data consistency for your organization.
Contract Utilization and Compliance
For construction companies, spend is often distributed across multiple projects and locations. Combined with the fact that procurement is not always a top concern during the entire project process, it makes maverick spending (here defined as spend outside contracts) a significant problem. If your procurement team cannot identify the contract leakages, you are essentially leaving money at the table and hurting the company's bottom line.
For procurement to create value and take control of the issue, they need to link spend with contract data. The linkage will enable detailed insights into contract utilization and coverage, for example, across business units and projects. Only then will they be able to understand the root causes and drive initiatives to mitigate the problem.
Managing Suppliers and Mitigating Risks
One of the biggest challenges in procurement lies in supplier management. Large, complex projects, where subcontractors and other suppliers often play a crucial part, demand a well-orchestrated collaboration with the best suppliers. For example, construction companies need to monitor financial risks, ensure the supply of high-quality materials, and assess supplier performance for a continuous business relationship potential.
If you are still managing your suppliers and their performance through Excel and emails, it is time to wake up. This complex task requires a digital tool to help you combine all the qualitative and quantitative data for making smarter decisions and mitigating risks.
Cost Reductions and Savings
In a volatile industry reflected by tight margins and cash flows, driving cost-saving initiatives is key to surviving. Since, spend accounts for a significant share of the overall costs (often 80% or more), procurement is a natural component of such initiatives.
Utilizing procurement analytics is a vital part of driving cost reductions. Ultimately it is all about transforming your data into actionable insights. First of all, it is a prerequisite for identifying opportunities that might exist, such as bundling and renegotiations. Furthermore, you would also need it to measure and track savings performance.
Do any of the above challenges seem familiar to you and your business? If so, you are not alone. Fortunately, Ignite Procurement can help you overcome these challenges and more.
Strategic Procurement in Construction, What Does it Mean?
In most sectors, procurement means an act of obtaining products or services. However, in the construction industry, it is a way of allocating design and construction responsibilities. For instance, deciding and assigning contractual responsibility for the design and construction of a project. It's a crucial task involving multiple stakeholders that can significantly impact the outcome of any construction project.
One area that construction companies need to focus on - and invest more resources in - is strategic procurement. In a volatile industry undergoing massive changes, procurement is required to be best-in-class to drive competitive advantages. But transforming procurement into a strategic business partner can be quite tricky without a spend management solution to support your needs.
So, what is strategic procurement in construction?
To boost the efficiency of each construction project, procurement needs to be planned carefully and strategically, taking multiple factors like budget, timeline, and quality into consideration.
A strategic approach to procurement means purchasing the goods required most cost-effectively. In the construction landscape, procurement professionals have to source high-quality products and services within a specific budget through a complex and blurred supply chain while simultaneously complying with regulatory guidelines. This makes procurement in construction a tall order. Precision, timing, and quality of procurement are, therefore, necessary in the construction sector.
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