From small home renovations to 20-story skyscrapers, every successful construction project is the culmination of dozens of different puzzle pieces. Procurement is how you bring these pieces together. Also known as the buying process, construction procurement is the process of sourcing for any labor, materials, or equipment needed to effectively complete a job.
Good planning is half the battle of any successful job. And of course, we can’t talk about planning without procurement. No matter how large or small the construction project is, mastering the construction procurement process will help you and your team stay on schedule, profitable, and deliver the greatest value possible to your clients.
But with so many moving parts to consider, how can you set yourself up for success? In this guide, we’ll tackle everything you need to know about construction procurement, starting with the basics.
Key Takeaways
- Construction procurement is the process of sourcing for any labor, materials, or equipment needed to complete a job and often is formalized using Subcontracts or Purchase Orders.
- For a smooth procurement process, make sure to know your plan, scope, and documents and have a procurement strategy. The better prepared you are on the backend, the easier it will be to know if the bids you’re getting are in the right ballpark.
- Keeping a checklist for every scope, revisiting the contracts and change orders for similar scopes on past projects and prioritizing good communication across the supply chain can help you avoid problems in the procurement process.
What is Procurement in the Construction Industry?
From small home renovations to 20-story skyscrapers, every successful construction project is the culmination of dozens of different puzzle pieces. Procurement is how you bring these pieces together. Also known as the buying process, construction procurement is the process of sourcing any labor, materials, or equipment needed to effectively complete a job.
Unfortunately, construction procurement isn’t as simple as hiring a procurement manager and writing a check. It only requires a procurement plan, and knowing where and how to start can help ensure smooth sailing throughout the process.
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The Construction Procurement Process: Subcontracts
For general contractors in particular, a sizable portion of procurement is subcontractor bidding, or choosing the right subs to bring onto the job. But before you can do that, you have to set the scope and write out bid packages. This is where attention to detail is key, so go ahead and pull out all the drawings and grab the colored highlighters. Take care to dial into the details of the project, grab your historical data or trusted cost book, and calculate your own estimate. It can be a time-consuming process to split out bid packages like this, but the more thorough you can be in the beginning, the better. Ultimately, the goal here is to make sure that the scope of the projects is fully covered and that the bids you receive are in the right ballpark. If you miss scope during the bidding process, it might be coming out of your construction company’s profit. What’s more, if you’re accepting bids that are too high or even too low, you’re potentially taking unnecessary risks.
Depending on how new your business, or project management team is, it might be a challenge finding contractors to bid on your project. And, because certain owners will require in their RFP that you get bids from at least three subcontractors to ensure competitive pricing, investing any time you can into growing you and your project teams network is crucial. There’s always a risk in hiring someone new, but sometimes a word-of-mouth referral from a trusted colleague can point you in the right direction.
Once the bids start rolling in, it’s time to level them against each other. Using a bid leveling sheet, itemize each bid to the best of your ability. This organizational process will help you:
Compare bids accurately – Price is everything, so leveling bids gives you a nice, ‘apples to apples’ comparison between each proposal.
Spot gaps in scope – Once you can see the project requirements laid out, it’s easier to see if anything’s missing when it comes to the scope of work, items, or pricing.
Save time – No one wants to waste time negotiating missing items after the fact. Leveling bids makes it easy to choose the most competitive (and complete) proposal and build method.
If you want to be even more thorough, consider bringing potential subs into your office. By having them walk through their bid, you can make sure everyone’s aligned on the terms and conditions of the job. After all, you don’t want to break ground on construction work without mutual agreement on scope, project schedule, and processes.
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The Construction Procurement Process: Purchase Orders
While the focus of procurement for general contractors might be on subcontracts, purchase orders can still play a pivotal role in delivering a project. Whether it’s a strategy to control the iron triangle of cost, schedule, or quality – or simply to fulfill the general conditions needed for a project, GCs will likely write their fair share of purchase orders.
Here’s what that process looks like:
Identifying needs – Just like with subcontracts, the first step is figuring out what materials and equipment the project needs and not covered under subcontracts. This would include materials for any self-performed work, but could also include rental agreements for crucial equipment like cranes or hoists, or the materials needed to protect workers or their completed work.
Supplier and rental company selection – Selecting reliable suppliers and rental companies for materials and equipment is key. To get the most competitive pricing, we recommend obtaining multiple quotes.
Issuing purchase orders and rental agreements – After selecting suppliers, it’s time to issue detailed purchase orders and rental agreements. These agreements should specify quantities, prices, delivery or rental periods, and any other relevant terms.
Coordination and management – Effective management of these procurements is crucial. This includes coordinating delivery and rental schedules that align with construction schedules and ensuring seamless integration with subcontracted work.
To summarize, the direct procurement of materials and equipment rentals by GCs is an essential component of the construction procurement process. Getting it right requires meticulous planning, supplier selection, and coordination with overall project activities and stakeholders.
One last note on the construction procurement process itself: the more you can prepare on the front end, by building a procurement plan, the easier time you’ll have once it’s time to look through bids. Know the plan set backward and forwards, and get out ahead on any questions subcontractors might have. Be able to stand in the shoes of the ones doing the work, and make sure the sequence of work you’re building (and the work environment itself) is conducive to their productivity and success.
How Contract Types Affect the Procurement Process
What type of contract you’re working with will potentially inform a lot of the choices you make when it comes time to procure subs.
Lump-sum – Since you’re trying to put together the lowest bid possible for the owner while getting ahead of all the risks that you can, lump-sum jobs necessitate prioritizing certainty over everything else. This means you’ll likely team up with subs earlier to create a proposal that works with everyone’s profit margins. You’ll probably favor providers you’re already familiar with to give you confidence in the completeness and competitiveness of your bid.
Cost-plus GMP – On the other hand, contracts where the scope is more fluid offer more chances to work with folks you might not be as familiar with (and with less risk to you) knowing that some amount of change orders are to be expected. On these jobs, you’ll likely prioritize subcontractors who are good partners (and who might even be helping the owner and architect refine the scope as the job progresses). Instead of the “here’s what needs to be done, do it” transactional nature of lump-sum jobs, cost-plus GMP jobs offer more opportunities for design and build collaboration.
Common Issues in Procurement & How to Navigate Them
Because construction procurement is so complex, there’s always potential issues to keep an eye out for as you move through the process, this is especially true on more complex projects. Here’s a quick look at some of the most common procurement issues and how to work through them.
Material & Labor Escalations
Sometimes, prices fluctuate throughout the lifetime of a construction project. It happens, and it’s largely the sub’s responsibility to account for these fluctuations. Oftentimes, subs will include an Escalation Clause in their contract to allow them flexibility in raising prices after a certain period of time, particularly on longer projects. Additionally, any price quotes for materials are normally set to expire after a set number of days, acknowledging that material prices are always changing.
All of these provisions can easily be compensated within the contract, but need to be recognized and agreed upon first and considered in line with the schedule to avoid any surprise increases.
Missed Buys
Also called ‘unbought scope’, this happens when something you didn’t see or understand as the design team intended it is left out of the construction contract. This is a common precursor to change orders. To try and compensate for unbought scope, you can overbuy certain smaller materials (like caulking, for example). This works for cost-plus GMP jobs in particular – you can buy in multiple contracts and then just get a credit change order deducted from whoever ends up not actually doing the work.
While there’s no substitute for experience in creating complete and clear scopes of work, it’s always helpful to build checklists for each scope that can be updated after each job to help you when you go to buy out the next contract.
Pay Attention to Where Scopes Come Together
Whenever one trade meets another, there’s always a chance you’ll run into the problem of missed scope. For instance, you might’ve assumed that something was included in a bid based on specs, but then the sub says no, they don’t actually do that.
Here are some typical examples:
Interface Between Electrical and Mechanical Systems – Often, there’s an assumption that electrical subcontractors will handle all wiring associated with mechanical systems. However, the mechanical subcontractor might be responsible for wiring their equipment. If not clearly defined, this can lead to scope gaps.
Finishing Work at Transitions – This involves areas where different materials or systems meet, like where tiling meets carpeting or where indoor systems connect to outdoor systems. It can be unclear whether the tiler, the carpet layer, or another trade is responsible for ensuring a smooth transition.
Installation of Fixtures in Renovation Projects – In renovation projects, particularly in commercial spaces, the installation of fixtures like lighting, shelving, or specialized equipment can be a gray area. This task may fall between a general builder, an electrician, or a specialized equipment installer.
Site Cleanup and Waste Management – While most subcontractors manage their waste, the responsibility for overall site cleanup can be ambiguous. This includes disposal of construction debris, cleaning after project completion, or ongoing site maintenance.
Preparation Work for Other Trades – For example, a carpenter might be needed to create supports for HVAC installations or electrical fittings. If this preparatory work is not clearly assigned, it may be overlooked or assumed to be someone else’s responsibility.
Weatherproofing and Sealing – This could involve sealing around new windows or doors, roofing intersections, or where new extensions meet existing structures. It may not be clear whether this is the responsibility of the carpenter, the roofer, or a specialized waterproofing subcontractor.
Safety and Security Measures – On larger sites, the installation of temporary safety railings, security fences, or other protective measures might fall between the scopes of the site manager and individual trades.
To help minimize confusion here, we recommend setting aside certain scopes for pieces of the job that might be caught in between trades. This might look like assigning them specifically to a new contract or simply setting aside a package for one of your existing subcontractors. The key takeaway here: no (unwritten) assumptions.
Schedule Problems
Even the smallest things can throw your schedule off track. Thankfully, there are a couple of things you can do to mitigate this and improve the chances of project success with effective project procurement plan, including:
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If you’re buying materials, know your lead times, and know how they’re getting to the job site. Know when your schedule says you need something, and make sure to order it by the appropriate date.
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Keep a procurement schedule on hand. By organizing multiple contracts by priority, you can sidestep potential scheduling mishaps. Basically, buy your contracts in the same order that you expect them to arrive on the job site.
Last Thoughts
A sound construction procurement process, which adeptly handles all types of construction procurement methods, from purchase orders for materials and equipment rentals and subcontracts for more turnkey scopes, is a vital part of risk management for any job. From choosing the right subcontractors to tracking material lead times, the work you do here makes sure everything and everyone is where they need to be when they need to be.