New research has found construction projects run an average of 46% over budget, fuelling the highest rate of insolvencies of any sector. Neeral Shah, founder and CEO of YardLink, says tackling inefficiencies in procurement and the construction supply chain will be critical in turning this around
The construction industry is facing some of its greatest challenges of the past decade. Inflation and higher interest rates are putting pressure on contractors.
In fact, recent reports reveal that 17% of all insolvencies in May 2023 belonged to the construction sector. Something must change.
While this situation may seem tough, there is good reason to be optimistic. At YardLink, our recent research reveals that many of the construction industry’s current problems are the result of inefficiencies in the management of the construction supply chain.
These cause projects to run, on average, 46% over budget. While external factors may prove outside our control, innovation can alleviate much of this burden through streamlining operations.
Hamstrung from the start
For many senior procurement managers, inefficiencies are present at the very start of the procurement process.
When selecting suppliers, senior procurement managers review, on average, 11 different quotes before choosing one, as well as source nearly 170 pieces of equipment per project. Suppliers also return quotes in varying formats, which makes the comparison of pricing and terms a tedious and complex task for procurement teams.
Moreover, in 30% of construction firms, CEOs and MDs are involved in these purchasing decisions. While many get involved in the hope of easing the procurement process, in many cases, their involvement does the opposite and leads to more human error and double entry.
Even raising POs is draining time, and money, from construction firms’ pockets. Senior procurement managers process an average of 85 POs every month, with each one costing on average £65 to raise. That adds up to a huge amount of money when you consider the volume involved.
Inefficiencies drill holes in project pockets
Once a firm has placed an order, the speed of service by suppliers presents a challenge to 28% of senior procurement managers.
Communication is a major source of this problem. Important information – like delivery details and site contacts – is often shared over the phone, causing some of this information to be, inevitably, lost or misconstrued. As a result, last-mile delivery has been a problem for 28% of procurement.
Once equipment and materials have arrived on site, further complications are common. Thirty percent of procurement managers reported disruption as a result of damaged, faulty or unhygienic equipment. Over a quarter (28%) of senior procurement managers have experienced delays in equipment collection, which increases frustration, delays projects and inflates overall costs.
All of these processes – from supplier selection to equipment return – are overseen and managed using only basic spreadsheets or pen and paper by the majority (65%) of construction firms.
As a result, contractors waste huge amounts of time figuring out what equipment is where, and where it should be coming from or going back to. It also raises the risk of costly errors. One site manager we spoke to had stored a large drill under a desk and, six months later, was still being charged as the procurement team hadn’t realised that the drill hadn’t been returned.
Constructing a prosperous future for the industry
While other industries, like retail, spend roughly 31% of their budgets on their supply chains (including raw materials, inventory, and suppliers), construction spends about 44% (£7.4m per project). That statistic alone makes it clear that the industry has a huge opportunity to streamline its operations by eliminating inefficiencies. managers.
Doing so is simpler than one might imagine. Almost a third (31%) of all participants in our research referred to “a lack of digital tools and innovation” as the biggest challenge they face. This is a problem that the industry can easily fix with due consideration and direction. It’s a chance to secure a more prosperous, stable future for the industry – yielding big returns from even small changes.
Fundamentally, technology will be the differentiator that gives construction companies a competitive advantage in this tough economic climate. Digital tools offer multiple opportunities to reduce costs – from enabling complete visibility over the different moving parts of the construction supply chain to reducing administrative burdens. A mindset shift to embrace, instead of shun, technology will be crucial.
Read the full report, The True Cost of the Construction Supply Chain.
