4 Major Types of Sourcing Strategies in the Construction Industry
This blog was refreshed on October 16, 2023.
The construction industry’s sourcing challenges demand diverse strategies, from traditional practices to collaborative ventures. Procurement teams must navigate complexities like changing weather, site conditions, and skilled trades while sourcing materials for diverse construction projects.
From building a single custom home to being responsible for an extensive housing development or a towering skyscraper, much of the success (and the profitability) of a construction project rests on the shoulders of the team responsible for sourcing the materials for its projects.
Typical factors that other industries have to deal with come into play, such as the suppliers, cost, quality, and availability of raw (building) materials. But construction can be far more complex because of many other variables unique to the construction industry. Also, many construction projects involve multiple parties. Some are stakeholders, some will be contracted for specific stages of the project, and some may be partners.
Arkestro, a Predictive Procurement Orchestration platform, proves indispensable in this dynamic landscape. It offers a centralized supplier database and AI-driven features, streamlining supplier management, enhancing collaboration, and delivering cost savings.
With so many possible variations in scale and approach, not every contractor or construction project uses the same sourcing strategy. Here are four of the most common.
Traditional Sourcing Practices
When the contractor for a construction project is responsible solely for the building component of the project, traditional sourcing practices are often used. Under this model, the design and major decisions are made by an engineering or consulting firm that runs the overall project. The contractor is responsible for sourcing any required labor, materials, and heavy equipment rentals—but they do so under cost limits and timelines set by the firm that is running the project.
A construction project that can be broken down into defined components frequently employs a management contracting approach to sourcing. With management contracting, there is essentially an additional layer added to the organization. The client and an engineer or consultant are still there, but the project general contractor takes on responsibility for managing the overall project. Subcontractors or specialized contractors are hired to undertake the various components of the build, reporting up to the general contractor.
Naturally, this approach also adds to the complexity of sourcing. Among the major challenges is undertaking sourcing for the project when one party is responsible for build and delivery, while another is responsible for the financial aspects.
Design and Build
Many home buyers hire a contractor who is responsible for both designing and building their home or building. A consultant is often brought in to oversee and manage the contract terms. But, the contractor is responsible for all aspects of the design and construction of the project—within the limits of the budget and timeline set out in the contract.
This is where a design and build approach to sourcing is typically employed. The contractor, the client, and the consultant will need to collaborate closely. The contractor will carry the risk of the project, so they will want to make sure they have a firm grasp of material, services, and subcontracting costs. Any cost over-runs are usually the responsibility of the contractor, making their sourcing team even more critical to the profitability of the project.
Working As Partners Or a Joint Venture
Collaboration is a valuable approach in the construction industry. Companies that work together on a successful project may decide to expend that relationship, working in partnership or on joint ventures going forward.
This approach requires a considerable adjustment to the sourcing process for all the companies involved. Which procurement department is responsible for which aspects of which projects? One department might have a superior relationship with a supplier, which would make it advantageous for them to be responsible for that aspect of sourcing.. Collaboration plays a key role for procurement teams to keep costs down, quality high, and projects on time.
Arkestro Supports All Construction Industry Sourcing Strategies
When you look at the four most common sourcing strategies used by the construction industry, a few things jump out.
First, we see the procurement team for a construction project tracking a lot of variables that can change rapidly. Many of these factors are subject to outside forces, such as bad weather. There’s no better example of this variability than what’s happened to the price and availability of lumber during the coronavirus pandemic. Lumber mills were shut down during pandemic lockdowns; then, many homeowners decided to embark on home renovation projects. As a result, lumber has been in short supply nationwide. According to Market Watch, the price of lumber has also increased by up to 60%.
The procurement departments at construction companies have been scrambling to source the lumber needed for projects. Supplier relationships and the ability to negotiate deals quickly are critical to avoid having a project held up because of a lack of material.
Perhaps the bigger takeaway from the different construction industry sourcing strategies is the importance of collaboration and transparency. In most cases, procurement departments don’t work alone; they work in tandem with the sourcing team at other companies involved in a project. If the procurement teams don’t work together, they miss out on opportunities like volume discounts.
Strategic Sourcing Software for the Construction Industry
Arkestro is a Predictive Procurement Orchestration platform that’s ideal for the construction industry, no matter what sourcing approach is chosen.
Arkestro is a centralized, up to date supplier database with the ability to manage the full supplier relationship using messaging, tasks, reminders and file sharing. Providing visibility to enable your organization to make true apples-to-apples comparisons and award decisions to get better quotes faster.
In addition to the design and features that support companies that are collaborating or partnering on projects, Arkestro saves money. The AI-powered software supports advanced features like automated processes to reduce staff time spent on repetitive tasks.
With Predictive Execution expediting contract awards, Arkestro ensures competitive pricing outcomes. Whether constructing single homes or skyscrapers, Arkestro empowers procurement teams to navigate the intricacies of construction sourcing efficiently, getting better results faster at scale. Schedule a demo today to optimize your construction procurement with Arkestro.