Engineer Inspecting a Construction Site
Engineer Inspecting a Construction Site

Procurement Management in Construction: Types, Process and Flow

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In the eye of many, managing construction is depicted by this picture: manual labor, mountain heap of raw materials, and non-stop operation in order to build the structure according to an owner’s vision. While they are not wrong, they do not see this: a stack of project documents, disorganized file cabinets, and spreadsheets of monitoring to keep everything in order and on file. However, as much as this interpretation of construction has been embedded in people’s perceptions for many generations, this can’t go on for long.

In a slowly transitioning digitization world, paper-driven procurement has a bad rep on a company’s bottom line. Manual inefficiencies brought about by this conventional method costs construction companies a considerable chunk of cash due to missed discounts, long purchase cycles, transaction disputes. Trying to improve the procurement processes with outdated tools such as file cabinets and the spreadsheet is like trying to power a microwave with steel and flint.

To take full advantage of the early purchase discounts, companies need to throw away the stone age procurement processes and embrace technological and digital solutions. Modern inventory management software and tools can transform painfully slow procurement processes to world-class overnight.

If your procurement process and inventory management techniques still rely on ancient tools, it’s time for a technology makeover and changes your business operation to digital. In today’s blog, we will dive into all the details you need to know to power up your overall procurement process.

What is Procurement?

 

Procurement refers to the structured methods, techniques, and means used to streamline a company’s procurement process, achieve desired objectives while saving budget, reduce timelines, and build a win-win relationship with all the suppliers involved. Procurement can be divided into three parts: direct, indirect, and services procurement.

What’s the difference between indirect, direct, and services procurement?

 

The three procurement types, commonly known as direct, indirect, and services, are subsidiaries of the encompassing procurement process and mainly differ in various aspects like definition, assignment, and many more. By taking a more profound understanding between these processes and knowing what they comprise, stakeholders will have an easier time in taking appropriate measures to fulfill the project’s needs, especially in the workforce facet, leading to a more enhanced construction crew management as well, regardless of it is on-site or in the office.

  • Direct Procurement: Refers to acquiring materials, goods, and/or services such as raw materials, equipment, machinery, and trucks. The main objective is to drive external profit, generate continuous revenue growth, and establish a collaborative, long-term relationship with suppliers.
  • Indirect Procurement: This is the purchasing and sourcing of goods, materials, or services for internal processes. It may be inclusive of consumables, perishables, facility management services, utilities, and travel options. The purpose of indirect procurement is to establish a transactional and typically a short-term relationship with suppers involved. 
  • Services Procurement: Consists of managing and procuring contingent labor and consulting services such as professional services, construction scheduling software subscription, etc. This type of procurement is used to plug people’s gaps and purchase external staff and services when needed. The main goal is to maintain contractual and one-off relationships with suppliers.

What is the Difference Between Procurement Management and Inventory Management?

 

Generally, inventory management is a collection of practices and processes that intersect with procurement or supply chain management. Moreover, inventory management optimizes a company’s inventory to facilitate uninterrupted sales, service, procurement, and production without compromising cost.

The bottom line is inventory management is under the umbrella of procurement management that brings the entire process in a company’s supply chain in a full circle. More activities and logistics are required in inventory management, but it would give the procurement team additional control over their actions.

What is a Procurement Process?

 

Procurement, being the most underrated aspect of project management for construction, is crucial for a company to streamline for efficient processes from start to finish. However, to enhance something means having a good grasp of the basics first. 

While procurement, which can be interchangeably used with the word ‘purchasing,’ is simply the process of obtaining necessary goods and/or services on behalf of a company. The procurement process is unique to an industry’s context and operation. Regardless of the uniqueness, the procurement process ultimately consists of 3 P’s: Process, People, and Paperwork. 

  • Process: the list of rules and guidelines that need to be followed while ordering, reviewing, obtaining, and paying for goods or services. Properly defined checkpoints and steps increase with the complexity of every purchase.
  • People: these are the project stakeholders and their specific responsibility in procurement management. They are in charge of initiating and authorizing every aspect of the process. The number of the project stakeholders involved is directly proportional to the value and risk of the purchase.
  • Paper: this comprises the paperwork and documentation included in every stage of the procurement flow, all of which are collected, consolidated, and stored for reference and auditing purposes.

What is the Procurement Process Flow?

 

 In order to keep the procurement process fair, efficient, transparent, and a good grasp of the procurement process flow is essential. Every procurement process has several elements, including supplier research, requirements determination, value analysis, contract administration, raising a purchase request, conversion to purchase order, monitoring/evaluation of received order, reviewal phase, three-way matching, record keeping, and payment fulfillment.

Even though companies’ procurement processes differ from one another, they generally comprise the following steps.

1. Needs Recognition

In the need recognition phase, companies are tasked to sketch out an accurate plan for procuring goods, materials, and services promptly and at a reasonable cost. Stakeholders involved in this initial step are the department heads, functional managers, and procurement officers. These stakeholders are then responsible for answering the following questions:

  • Is there a real need for this good/service?
  • Can an established source or existing contract fulfill this need?
  • Will this require special approval of any sort?

2. Purchase Requisition

Purchase requisition or request are written or electronic documents submitted by the project stakeholder to seek the help of the procurement team in fulfilling an existing need. This mainly comprises necessary information that is required in procuring the needed good, material, or service.

3. Requisition Review

A project’s procurement process will only commence once the submitted purchase requisition has been cross-checked and approved for budget availability. The review requisition stage is part of the project managers responsibilities to review the requisition package and cross-check if there is a genuine need for the requester’s goods/services and verify whether funding is available.

Approved purchase requests turn into Pos, and rejected requests are returned to the requisitioner with a valid reason for rejection. In the process of approval of purchase orders, stakeholders answer the following questions:

  • What is the approved and available budget for this item?
  • What is the schedule for the delivery of the purchase?
  • Where should the approved items be delivered? 

4. Solicitation Process

Now that the requisition is approved and the PO is generated, the procurement team will develop a respective procurement plan and layout the corresponding solicitation process. The scope of the individual solicitation plans is based on the complexity of the requirement.

5.  Evaluation and Contract

By the time that the solicitation process is completed and closed, the procurement team, together with the evaluation team, will review supplier quotations and choose the supplier best fitted to fulfill the current need.

Once a vendor or supplier is selected, the next step would be the contract negotiation and signing. A legally binding contract between the contractor and the vendor activates right after signing the purchase order.

6. Order Management

In this step, the vendor delivers the agreed goods or services within the stipulated timeline as stated in the contract. Once received, the purchaser examines the delivered items and notifies the vendor if there are any issues.

There are three documents critical in the order management step of the procurement process: Purchase orders, packing slips, and vendor invoices. These documents are reviewed simultaneously to pinpoint discrepancies that should be addressed immediately to avoid disputes.

7. Invoice Approvals and Disputes

Once the matching of the three essential documents in the order management step is done, the invoice is then approved and forwarded for payment processing, depending on the company’s systems.

8. Record Keeping

To conclude the whole procurement process, record keeping is implemented to document bookkeeping and auditing for future reference and stored in one central location.

Why Should You Automate Your Procurement Management Process?

 

A solid inventory management software, like Pro Crew Schedule, can streamline the cluttered procurement and inventory process of construction companies and keep it as transparent as possible for all of the stakeholders to see. No information is lost, and stakeholders can check the list of inventory items on hand and be notified once the supply is running low. A streamlined inventory management process offers excellent control over every stage of the project lifecycle.

Learn more about inventory management here by requesting a free live demo.

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