Did you know that 55% of companies plan to increase their supply chain investments in 2024? A great example is IBM, that uses artificial intelligence (AI) & data analytics technology to improve its procurement processes. The tech giant has invested in developing innovative platforms that leverage these technologies to predict demand, analyze supplier performance, and optimize purchasing decisions.
Procurement isn’t just a step in the supply chain — it’s a driving force behind innovation. In industries like construction, an effective procurement strategy can be the key that determines a project’s success.
Keep reading to learn more about how construction procurement is changing thanks to new technologies!
Table of contents
What is the construction procurement process?
In simple terms, procurement refers to how a company obtains the goods and services it needs for business operations.
For instance, procurement in the food service industry is characterized by sourcing perishable products, adhering to strict food safety regulations, and maintaining efficient logistics to ensure food freshness and quality.
This is no different in construction, where procurement involves acquiring the materials, equipment, or services needed to complete a project. This process is vital in construction due to the complex nature of projects, which often involve multiple types of general and specialty contractors. What also might be shocking is that procurement accounts for approximately 40-70% of a company’s total project spending.
What’s the difference between procurement & purchasing?
- Purchasing involves short-term transactional activities such as placing orders, raising purchase orders, receiving goods, and arranging payments. The main goal is to obtain items at the best price, focusing on immediate needs and cost savings. Simply put, purchasing is just one part of the broader procurement process.
- Procurement is a long-term strategic approach involving sourcing vendors and negotiating contracts, among other activities. This process is concerned with the overall value of transactions, emphasizing building strong, mutually beneficial relationships with suppliers and considering factors beyond price, such as quality and service.
For instance, purchasing simply involves ordering X bricks for a project. In contrast, procurement encompasses determining the needed quantity, negotiating with suppliers to secure the best price and quality, and overseeing the entire process to ensure timely delivery.
Step-by-step process
Several stages are involved in construction procurement. Here’s a rundown so you can follow along:
- Identification of project requirements: This initial step involves identifying the specific project requirements and addressing the following question: What is needed? During this phase, conducting a market study is essential for determining the project’s scope as it helps in understanding market conditions, potential vendors, available resources, and possible challenges.
- Vendor selection: Next, you’ll select potential suppliers & vendors based on their experience with similar projects, client references, and financial stability. This stage includes a construction bidding process, where you can solicit proposals from multiple vendors to compare offerings.
Note: A supplier provides specialized goods, services, or raw materials, for manufacturing. A vendor, on the other hand, sells finished products or services directly to customers or businesses. Which one you choose depends on your project’s needs.
- Evaluation: Once proposals have been submitted, they must be assessed thoroughly to ensure they meet the project’s requirements and budget. This stage often includes:
- Comparing the strengths and weaknesses of each bid
- Checking references
- Sometimes conducting interviews or presentations with the top contenders.
The objective of this assessment is to choose the proposal that provides the best value in line with the overall goals and limitations.
- Negotiation: Once the bid that best fits your needs has been selected, the negotiation stage begins, where you break it down and discuss specific terms and conditions.
- Contract award: This phase represents the final approval, where the contract is officially signed by all parties involved and approved by the buyers’ legal department. During the contract award, all project requirements are agreed upon. This step finalizes the contractual agreement and allows the work to proceed with clearly defined terms.
- Contract management: An ongoing phase that involves regular communication with the contractor to monitor the contract’s progress. This includes reviewing reports, timelines, and job performance. Tip: Being proactive ensures all details are met and issues are resolved before they become major setbacks.
What does a procurement manager do?
According to a Robert Walters study, in 2024, the logistics, distribution, planning, sourcing, and procurement functions will see the highest demand for talent.
The procurement manager is one of the most sought-after roles today in the construction sector, and it’s no wonder since they are crucial in ensuring organizations have the resources to run smoothly.
A procurement manager is not just a buyer, they are a strategist who knows the importance of building solid relationships with suppliers to ensure a steady and efficient supply of goods and services. This work requires a deep understanding of the company and market needs, as well as the ability to negotiate deals that benefit both sides.
The main responsibilities of a procurement manager include:
- Sourcing reliable suppliers and vendors based on project requirements and initiating partnerships.
- Comparing proposals and negotiating contracts with providers to secure advantageous terms.
- Building and maintaining long-term relationships with the key suppliers & vendors in the sector.
- Collaborating closely with the internal departments to understand company demands and make sure contract terms are favorable.
- Controlling the procurement budget & developing and implementing innovative and cost-effective procurement strategies.
- Staying up to date on changing industry trends to ensure ongoing growth and adaptation.
Types of procurement in construction
If you’re not sure which method of procurement strategy is right for your construction project, we present you 4 types:
Traditional
Also known as design-bid-build, traditional procurement is the most common building method. In this approach, the client first hires a design team to create the building plans. Once the plans are complete, construction companies bid on them. Typically, the company that offers the lowest price is awarded the contract to build the project.
One of the main advantages of traditional procurement is that it provides a clear and well-defined contract that outlines the project’s scope. This clarity facilitates accurate cost estimation, as all necessary construction elements are specified in the design documents and plans beforehand.
However, traditional procurement can be slow and inflexible, as any changes to the design or budget require renegotiation of the contract
Design & build
Design and build procurement is a method — also known as single-source contracting — where the client hires a single contractor to handle both the design and construction phases of the project.
This approach can offer advantages by enabling faster project completion and improved cost control through communication with a single provider. The contractor is responsible for supervising these stages to ensure the project is completed as intended.
A downside of this method is that it can limit competition and fresh ideas. Because the client hires one contractor to handle both tasks — design & construction — they might miss out on different viewpoints or out of the box thinking that comes from the diversity of ideas.
Construction management
This method entails the client hiring a construction manager to oversee the project while separately contracting with individual trades, such as electrical, plumbing, and carpentry.
It offers greater flexibility since the client has more control over selecting specific trades. The construction manager coordinates various specialties and ensures that the project is completed correctly.
However, this approach can be more complex and requires more oversight from the client, as they must manage a larger number of contractors.
Public-private partnership (PPP)
PPPs, or public-private partnerships, are a method of managing construction projects where both the private and public sectors collaborate to finance and build projects such as public transportation networks, parks, and convention centers. This approach can result in faster project completion, greater efficiency, and shared risks between the two sectors.
Such partnerships work effectively when private-sector technology and innovation are combined with public-sector resources and strategic backing to ensure the project’s success.
Here’s a simple example: a city government might be too indebted to fund a big building project. Instead, a private company could step in to cover the construction costs, and in return, they could receive a share of the rental income from the building’s tenants once it’s up and running.
Cemex Ventures enhances procurement with next-gen technologies
The procurement software market is projected to reach US$14.3 billion by 2029. The rising demand for advanced procurement solutions stems from the historically manual nature of the process, with efficiency and complexity being major challenges and opportunities for optimization. Recent technologies like machine learning, address these pain points, transforming a previously tedious and non-digital process into a streamlined, data-driven one.
At Cemex Ventures, we’re always seeking innovative solutions that enhance procurement in construction through the most disruptive construction technologies. StructShare is a prime example:
StructShare
Cemex invested in the construction procurement software company in 2023, which had previously been featured in our Top 50 Contech Startups List in 2021.
StructShare has revolutionized the construction supply chain and simplified the purchasing of building materials by integrating field, accounting, and procurement teams through a unified cloud platform. The solution provides end-to-end management of orders, RFQs, POs, delivery capture, and invoice reconciliation, with real-time tracking of budget, inventory, and expenses.
Does your startup have a procurement solution that has the potential to revolutionize the construction industry?
