I have my first live presentation coming up next week.
I will be talking on the topic of procurement in front of a small business networking group. These are folks who have their own businesses and may have limited or no construction experience. As such, I will be keeping the presentation rather high level.
So today, in preparation for my presentation, I will give you a brief overview of construction procurement. What it is. The benefits of procurement. And how procurement works.
In the context of construction, procurement is the process of identifying, soliciting, negotiating, and contracting service providers to perform the work. This means selecting and hiring professionals such as architects, engineers, and construction managers and in some cases contracting laborers such as carpenters, plumbers, steel workers, etc.
There are quite a few benefits to procurement. A rigorous and thorough procurement effort yields higher quality work, mitigates risks for both parties, reduces costs for the owner (and in some cases it may even reduce cost for the service provider), and reduces the overall project schedule.
The way that procurement improves quality, is by paying careful attention to the scope of work.
A good procurement manager looks for gaps in the scope of work. In doing so, the procurement manager seeks to eliminate ambiguity and unknowns from the project.
In fact, a procurement manager may halt a solicitation if he feels the scope is incomplete or there are too many unknowns to solicit the work. I should also mention that in cases where the scope of work is inherently ambiguous and where many gaps exist and cannot be overcome a good procurement manager will shift procurement strategies to allow for that ambiguity to occur. Such strategies should be used sparingly, until the ambiguity can be removed and a fixed price is achievable.
Knowing just how far to allow variable pricing to go is where procurement experience comes into play.
Another way a procurement manager improves quality is by considering the scope of work in terms of total cost of ownership.
Total cost of ownership refers to the cost of management and maintenance. Management and maintenance of real estate can be far more expensive than the initial cost of construction. Procurement considers this. This may mean choosing higher quality over less expensive options. For some of you that may sound contrary to the mission of procurement. I assure you it is not.
Procurement mitigates risks in several ways.
We discussed how procurement reviews scope of work to ensure it is complete. Not only does that improve quality it also mitigate risk for the owner and the builder.
We also discussed how procurement minimizes unknowns that is also a way of mitigating risk.
Procurement also ensures that the pool of bidders has been properly qualified. A neutral procurement manager with no allegiances or preexisting relationships with the vendor pool is best suited to evaluate the qualifications of your supplier pool. Other members of a project team such as architects and project managers will have previous relationships. Such relationships can sometimes be helpful but oftentimes it puts unqualified suppliers on your bid list. This is detrimental not only to the owner but also to the bidder. A bidder who is too small or too large for project will be at a disadvantage in a competitive environment.
Procurement also mitigates risks by ensuring the contract terms have the most favorable terms for the owner. Lawyers play a key role in this particular item however their purview can often be limited to legal terms. Procurement will also look at business terms. An experienced procurement manager will have sufficient experience with construction business terms to advise an owner on which terms our most favorable for them.
Procurement can also help reduce the schedule of a project.
Anyone in the construction industry would probably sneer at that sentence.
Procurement in construction is often seen as a hindrance to schedule not a benefit. The opposite is true.
We’ve already talked about how procurement helps ensure the scope is clear and complete. This improves quality mitigate risk and also improves the schedule.
A well conceived award decision will also include schedule as a factor. Owners who consider schedule in their decision-making benefit from better planned or more aggressive execution plans. A good solicitation will include inquiries about project planning and project scheduling these are often missed in less rigorous request for proposal.
We previously discussed how procurement negotiates the most favorable terms for an owner. One of those more favorable terms are “time is of the essence” clauses, early completion bonuses, and lateness penalties. These terms in a contract specifically benefit schedule.
I have intentionally made cost the last benefit of procurement.
Everything that I have previously mentioned as being pivotal to a good solicitation factors in to reduce cost. Eliminating unknowns reduces costs. A more complete and better scope of work reduces cost. A more efficient schedule reduces cost.
And then of course there’s always negotiations. I love negotiating. It’s my favorite part of this work. It’s not because I enjoy strong arming people. That is not what negotiating is about. Win-Win negotiations are what I strive for. Happy suppliers produce better buildings. Unhappy suppliers hit you with change after changes after change.
That said, negotiations do specifically address the initial cost of a project. In addition negotiation of change order rates, alternates, and allowances are all critical to cost containment and control.
How procurement works
I will resist the urge to go into the specific ways that procurement does all this.
Suffice it to say that we take a very rigorous approach to every project.
We follow multi step processes for every engagement.
It may not be common knowledge that procurement is part of the project from conception to completion.
Many believe that procurement is brought in only when it’s time to put in a contract. The truth is that good procurement begins before the start of design.
Your procurement manager should be developing strategies, supplier profiles, and pre qualifying potential bidders even before you’ve put pen to paper.
In subsequent steps they will review your scope, identify the best form of agreement, develop the request for proposal, and administer the bid. When the bids come back the procurement manager performs detailed data analysis which informs them for later phases of negotiation. They present the owner with scores and ranks to help them make award decisions. They lead negotiations.
The procurement manager then finalizes the agreement ensures that everybody signs it and that the forms are distributed to all parties. These are steps that are often missed or fall on the owner to complete.
And finally procurement does not walk away when the contract is signed. Procurement stays with the project helping both parties navigate legal terms and reviewing change orders and payment application requests to ensure that both parties are abiding by the terms of the agreement.
I hope this gives you a perspective on what it is I do. It’s a service that I believe really strongly in. I think I bring great value to my clients. And I enjoyed my work very much.
If you are a procurement manager or you’ve worked with one before I would love to hear from you. Tell me what your experience has been. Tell me if you have seen the value that I have described.
If you haven’t had good experiences, I’d love to hear from you too. Tell me why you haven’t seen the value. Hopefully I can convince you that some managers will bring the value I just described.