The current transformation of the industry – from the traditional skilled trades production to an industrialized and externalized work environment – is changing the supply chain and its role in construction. Although industry participants may believe that direct material purchases will lower their final cost of construction, this total cost is instead driven by the required accommodations for changes and uncertainties provided by contractors and distributors.

This article will explain various procurement models, their advantages and disadvantages, and their requirements for success.

Procurement Chain Models

“Procurement Chain Management in the Construction Industry” (PCMCI) by MCA, Inc.¹ shed light on the actual cost drivers of construction projects. As shown in Exhibit 1, this research investigated and modeled the various methods of procurement, including the comparative risks, costs, and benefits of each of the procurement models. However, as the current state of production still heavily relies on the skilled trades, some of these procurement models and behaviors may or may not apply to the construction industry.²

The three models of procurement identified in the research are:

• Model 1: Specialty Contractor Procurement Model – the subcontractor procures the material, adds profit to it, and carries the labor, warranty, timing, and accuracy.
• Model 2: General Contractor Procurement Model – the GC/owner procures the material, and the subcontractor includes a line item for added labor and other risks.
• Model 3: Owner Procurement Model – the subcontractor and

GC/owner work together to reduce structural costs by collective reduction of the risk and collaborative approach for procurement and labor management.

Based on these findings,³ direct purchase models do not account for the know-how from the value transfer between distributors and subcontractors (as shown in Exhibit 1).

In other words, the price and profit models used for purchasing at each point in the supply chain only focus on the cost of the material and are disconnected from a full understanding of the costs of procurement. Examining further impacts and possible models can help industry participants focus on their expertise and improve the logistics, as well as reduce the total cost of material management and handling.

Correctly aligning each business with its core competencies will lead to the best possible outcome for all stakeholders.

The answers to the following questions enable future industry participants to design and implement an appropriate supply chain model:

1. What products and services can be offered to transfer value across the supply chain?
2. What will the future supply chain look like following the Industrialization of Construction^®?⁴
3. Will another procurement model be needed?
4. What is the impact of prefabrication on jobsite safety and reliability?
5. What is the impact of distributors’ services at Generation 2 and 3 (defined later) on final project cost and time?
6. What is the impact on cost, quality, and timing of projects when the distributor and manufacturer get involved earlier?
7. Can we rely on the usage of the scientific work breakdown structure (WBS) at the appropriate level for the contractor, vendor, and manufacturer to reduce the cost of material handling and returns?
8. What is the true cost of returns, including labor, on the supply chain for direct purchases?
9. Will there be a common e-commerce platform to improve information and data flow?
10. Will digitalization, commonization, and interconnectivity (DCI™) have the ability to connect various systems and enterprise resource planning (ERP) software to enable simultaneous access to the information and its flow?

Understanding Procurement

Understanding the cost to the industry and devising a lower cost of material logistic management requires that we stop thinking about material and start thinking about procurement. Procurement brings things together from where they are to where they are needed for installation. Data-based procurement accounts for material and information handling for:

• Ordering, over-ordering, and returns
• Receiving, waiting, unloading, and sorting
• Keeping track of back orders and knowing where they are
• Moving material into, within, and out of the jobsite
• Preparing and packaging material for installation
• Reordering lost materials and managing what happens with double orders
• Managing tools and equipment
• Moving to accommodate jobsite condition changes
• Handling delivery mistakes, damages, and storage to be used later

At a high level, the procurement phase of a project can be broken down into four areas:

1. Subcontracts
2. Tools and equipment
3. Materials
4. Tracking

Visibility

Within each of these areas is an expanded WBS (Exhibit 2).⁵ Ideally, each of the boxes in the WBS can display data gathered to understand the system. The work associated with procurement and its aftermath, when it doesn’t go smoothly, is often not made visible by subcontractors. It is typically included as a line item on the overall project schedule, but lacks the intricate connections that make or break a project’s completion, such as:

• Late decisions or changes in decisions by end users
• Unknown or delayed lead times
• Unknown material location or shipping status
• Submittal process and potential delays

All of this information is available somewhere in the construction project process; but, without a collaborative model that focuses on information rather than material costs, these details and connections are overlooked, causing downstream issues for the owner such as time, cost, quality, etc.