In managing construction, effective procurement management is critical in determining the success and efficiency of your project and organization. However, procurement management requires considerably more than simply purchasing goods, materials, or services – it is a complex process that can provide a great advantage to a construction company in various ways, not just from a financial standpoint. One of the strategic functions of a project manager involves a large extent of duties, including materials sourcing, vendor management, cost control, and inventory management. For inventory-centric business sectors like the construction industry, how you handle your procurement processes can either make or break your project’s success.
In this article, let us dive in on what procurement management is and how it fits into the bigger picture of how you manage your project’s processes, workflows, and progress. Before we proceed on how to boost the effectiveness and efficiency of your procurement management, let us start with the basics first.
What is Procurement and Procurement Management?
In a nutshell, procurement is the term used to refer to the act of obtaining products, materials, or services needed to complete a specific project. Project managers often need to procure products and services within time and budget constraints to meet tight construction targets and milestones. This means they have to make complex and sound business decisions to guarantee that they choose the best goods and services within these constraints without sacrificing quality standards.
On the other hand, procurement management refers to a series of strategies, organized procedures, and tools that may be utilized to simplify and streamline an organization’s procurement process. Procurement management involves:
- Negotiating profitable production and supplier contracts.
- Spearheading innovative and creative building solutions.
- Playing an essential part in construction inventory management.
Effective procurement management aims to accomplish desired outcomes while saving money, decreasing time, and developing win-win supplier relationships.
What are the Types of Procurement?
There are three types of procurement, namely direct, indirect, and services procurement. In this section, let us dive into how these three vary in definition, duties, and how they fit in the processes during project management for construction.
Direct procurement is the process of locating and buying the raw materials, finished products, and services needed by a firm to complete the production process on time. These items are directly connected during the construction process of a specific project.
Direct procurement affects the activities and workflow processes, so a break in the chain will result in delayed activities and, in turn, affect the project progress as a whole. A project manager usually keeps a construction inventory list to determine the current inventory status and predict deficits to communicate with vendors for the supply.
Examples of direct procurement for construction include:
- Supply and installation of machinery and equipment
- Raw construction materials such as cement, gravel, reinforcing steel bars, and paints
- Finished goods such as electrical and plumbing fixtures
- Outsourcing and subcontracting labor for different trades
Indirect procurement involves sourcing out products and services that support a business’s back-end operations and are not necessarily directly used in the construction. These items, in their way, are still essential in the completion of your projects, sort of like playing a supporting role to ensure a smooth project process and completion.
Examples of indirect procurement for construction include:
- Site and office utilities, such as electricity, water, or internet
- Warehouse, office, or staff housing rentals
- Office equipment and stationery items
Services procurement is about obtaining people-based services, usually a one-time contract with an agreed-upon scope and deliverables. They include project-based workers such as consulting services and specialty services ranging from IT, marketing agencies, accounts payable, law firms, facilities management, and other services.
Examples of services procurement for construction include:
- Digital tools such as construction inventory app or software
- Design consultancies for different trades
- Third-party quality control and assurance team
- Marketing and advertising services
- Travel, freight, and logistics
Why is Procurement Management Important in Construction Businesses?
Because it directly affects a company’s profit margin, procurement is critical in any business industry – its importance is not just limited to construction. A company’s cost of acquiring all the necessary goods and services must be less or equal to the targeted budget constraints for the company to be financially successful and profitable.
Without proper procurement management, companies may be paying for a higher cost than what is required for the goods and services they need. These small additional costs could add up over time, resulting in significant losses. Thus, the procurement management of a construction project should consider the company’s corporate strengths and management strategies, capabilities, and financial power.
What Are the Key Factors in A Procurement Management Process?
Regardless of what business industry you are in, every procurement management process consists of three key factors: Process, People, and Paperwork.
How you set up your process is a key factor in making your procurement process work. It is a standard list of rules that must be followed while reviewing, ordering, obtaining, and paying for goods/services.
These are project stakeholders that have specific accountability in the procurement cycle. They take care of initiating, evaluating, or approving any documents required to proceed with the process.
This refers to all the paperwork and documentation generated throughout the procurement process, gathered and kept for future reference and auditing. This may include bid evaluations, quotations, approvals, and receipts.
What are the Steps of A Comprehensive Procurement Management Cycle?
Every business has its procurement process flow distinct from the others. It often depends on its expertise, capabilities, and management styles. Here are seven crucial steps of a comprehensive procurement management cycle:
1. Start identifying your inventory needs
A procurement process begins with the identification and consolidation of your inventory requirements. Plan out your required quantities and target delivery schedules for activities where your inventory is needed. This is to keep your work operations running smoothly and avoid any work stoppage.
2. Identify and evaluate a possible list of suppliers
Once you have identified your inventory needs, the next step is to identify a list of potential suppliers that cater to a specific good or service. Sourcing out suppliers can be done through a simple web search or by sending out bid invites. You can then evaluate the suppliers based on your specifications, quality, pricing, or warranties. After the evaluation, the supplier who offers maximum value and the best market pricing is awarded the deal.
3. Negotiate contracts and agreements
The contracting procedure starts once a supplier has been selected to meet the needs of a company or other entity. Critical aspects such as payment schemes, scopes, terms and conditions, and the delivery timeframes are evaluated throughout this phase.
4. Place purchase requisitions and purchase orders
Purchase requisition (PR) and purchase order (PO) are created when an organization has finalized its contract with a supplier. These documents contain the product or service description, price and quantity information, supplier information, and the approval process.
5. Complete payments
Once a purchase order is released, the supplier readies the items for delivery. However, they often require a down payment before they deliver the goods. Succeeding payments are released post-delivery, depending on the agreed payment terms.
6. Receive and audit delivery
Based on payment and contractual terms, the supplier delivers the goods/services. Upon delivery, construction firms should inspect the goods to verify that no material flaws or quality problems need to be returned or exchanged.
7. Maintain proper records
After receiving the delivery, it is essential to properly maintain all invoices to monitor spending and control costs within the agreed budget.
How Can You Make Your Procurement Management More Effective?
Procurement management has become more complicated in the last few years. With the rapidly increasing, fluctuating construction costs, complex negotiations, strict vendor evaluations, and tighter deadlines, the days of managing procurement with traditional practices are over. This section has listed four practical strategies to streamline your processes to generate effective procurement management, ensuring project success.
Plan according to your budget
Construction projects are often limited to time and budget constraints. Your construction budget dictates how fast you can finish a project, the degree of expertise you can employ, the materials and products you can get, and the technologies and equipment you can use.
Focus on the value and not the price
In procurement and bidding processes, the lowest-priced goods or materials are not always the best option. The value should be the driving force behind the procurement process. Always strive to get the best possible product that provides the most value for money without compromising the project’s quality and standards.
Ensure open competition with your suppliers
Creating a comprehensive supplier selection process that is bias-free and transparent ensures an equal playing field for all suppliers. This strategy pushes the suppliers to place the correct prices and not add an unrealistic profit. This open competition is advantageous to the project manager and the construction company, who will be able to get excellent value for their money.
For most project managers, procurement management is complicated, often requiring too much time and effort to complete one process or cycle. Also, procurement and inventory management often go hand-in-hand when it comes to managing construction projects. Many of these activities would be tedious if done manually and are subject to the possibilities of human error.
However, many of these processes can be done efficiently by leveraging technology with inventory management functions, like Pro Crew Schedule. Going digital in the construction industry can help you achieve smooth and more seamless procurement management.