To manage the complexity of procurement on large construction projects requires an exceptionally robust technology solution.
Most commercial procurement software products are designed to handle general-purpose purchasing for a broad range of businesses and industry applications. Procurement on construction projects however, is quite different. It’s not at all like buying pencils for the school board, or buying a fighter jet for the defense department. Construction project procurement has many characteristics that place heavy demands on the software that supports it.
The differences fall into the following six categories. I’ll go on to discuss each of these in more detail further below:
- The need to handle High Volume Procurement
- The requirement to manage Long-Lead Items and Expediting
- Integration with Project-Level Cost Codes
- Tie-in with Project Controls
- The Need for Speed
- Multi-Discipline Collaboration
In case you didn't notice, I've left out any of the hairy legal details that are unique to construction contracts. The contract management side is a whole other beast that is best tackled in another discussion. For this, I'm primarily focused on the procurement process. I've also avoided the accounting side of the debate with respect to holdbacks, retainage, punch lists, etc. Again, this is an area more related to the contracts and accounting end of supply chain. So anyway, here is a more detailed discussion around each of the above cornerstones of construction project procurement.
High Volume Procurement
Large construction projects face an enormous volume of materials, labor services and equipment that all needs to be contracted, procured and successfully delivered to multiple jobsites & warehouses on a very explicit schedule. The procurement teams on larger construction projects can face managing many thousands of concurrent contracts, hundreds of thousands of line-items and hundreds of suppliers and subcontractors. Efficiency, timing and accuracy in the procurement group are vital to ensure these projects are executed with precision. The technology that supports this high-volume procurement needs to provide the workflows, data and productivity tools to ensure the procurement team can meet the required demands.
Long-Lead Items and Expediting
Construction projects typically procure a great number of items that need to be purchased well-ahead of time to account for manufacturing, design, shipping, etc. Some items can take many months from engineering-drawings to delivery at the jobsite. This long-lead advance procurement requires dedicated expeditors to monitor each stage of the process to ensure timely and quality delivery. Additionally, the procurement department on longer projects will secure material supply well in advance to mitigate risk of availability, timing and price increases. Project procurement software needs to support the demands of expeditors and long-lead procurement.
Project-Level Cost Codes
Construction projects have a complex hierarchy of project cost codes that go beyond the codes typically found in the accounting system. Each level of the work breakdown structure, and several levels below, will have their own cost codes for budgeting and tracking purposes. Procurement that’s performed on construction projects needs to be validated and assigned to specific areas of the project. This goes much deeper than supply chain software for accounting. Project procurement software needs to understand the connections between what’s happening in procurement and what’s happening on the project.
Similar to the previous point, there is a very tight connection between procurement and the project budget and project controls. Accounting systems are designed around the needs of accountants. Project controls dives deeper to ensure each level of the project is running to plan.
The Need for Speed
Buyers and Expeditors on the procurement team need to work efficiently. It’s extremely risky for purchasing to become the bottleneck on a high-paced construction project. Larger projects have a lot riding on the ability of the procurement department to execute effectively. Any errors or delays in procurement can cause expensive cost overruns, so the procurement software used needs to provide easy workflows and productivity features to ensure a high-throughput of purchasing power.
Most procurement software is designed to be used as an extension of accounting, so rarely involves the kind of tight collaboration with the project teams required for construction. Construction project procurement involves many players including: Engineering, Project Controls, Project Management, Buyers, Expeditors and, of course, Accounting. All these individuals or departments play a key role on both the inputs and the outputs of the procurement function on projects.