Introduction
“Better Materials Sourcing” is the second chapter of Kojo’s groundbreaking book, “7 Steps to Better Procurement for Trade Contractors.”
The second step in the 7-Step Procurement Process is Sourcing. Sourcing involves gathering relevant information to determine what materials you should buy, when you should buy them, and from whom. In this step, contractors issue RFQs to source material price and availability from multiple vendors to make smarter purchasing decisions.
Effective sourcing is critical for managing material costs, but it's only one piece of the puzzle. To truly outpace your competitors and increase your profit margins, you must pair your sourcing strategies with the efficiencies gained from step one, Planning. When both planning and sourcing are optimized and executed efficiently, you can maximize your material procurement and gain a significant competitive advantage.
Where inefficiencies exist in Sourcing
Sourcing quotes for materials is a typical step for contractors. A survey conducted by Dodge Data and Analytics revealed that 81% of contractors request quotes at some stage of a project. However, many contractors don't have a structured approach to sourcing materials. They may be unsure about when it's appropriate to ask for pricing and availability, and they may lack an efficient and auditable process for doing so. Consequently, they risk missing out on opportunities to save money by skipping the quoting process or wasting valuable time by obtaining quotes inefficiently.
To understand the differences between great and good contractors in their Sourcing processes, we can break down the process into four phases:
- Determining which materials need to be purchased and their quantities:
Knowing what needs to be purchased, at which quantities, and by when the parts are needed is an important first part of the battle - how can you source if you don’t know what you’re buying? Effective sourcing requires an organized and reliable method of gathering information from the field when they need materials, project managers when they’re doing their project-level planning, warehouse inventory, and anything being held for release by vendors. Retrieving and organizing this information to make informed decisions can be like untangling a ball of yarn. - Identifying when it makes sense to source pricing and availability
It's not always necessary to get quotes for every material purchase, and doing so can actually slow down the procurement process and increase costs. That's why it's important for contractors to identify the situations where it makes the most sense to source quotes for materials. By having a clear understanding of when to do so, contractors can optimize their procurement process and save money on material costs. Without clear guidelines and processes in place, opportunities for cost savings can be missed, or valuable time can be wasted on unnecessary quoting. - Identifying which vendors to request quotes from:
In the past, contractors could rely on a few preferred vendors they had built relationships with over the years and trust they’d get the best prices and ensure availability. However, in today’s market climate, with the industry being hit by a brick with inflation and supply chain issues, those relationships only go so far if the vendor can’t source the materials needed or the price is simply too high. In fact, recent research by the Associated General Contractors of America (AGC) found that 60% of contractors have experienced project delays due to material shortages, and 33% have seen an increase in material prices of 10% or more. This means contractors have to consider a broader group of vendors to source any given order from, including finding new vendors, which adds a layer of complexity. Contractors find themselves having to make hard decisions if they haven’t implemented a good system for standardizing the way they collect pricing, inventory availability, and quotes from vendors to determine from whom it’s going to be best to buy.
- Issuing Requests for Quote [RFQs] to multiple vendors:
With recent inflation and supply issues, prices have become volatile and unpredictable. Gone are the days where every vendor is charging the same general price as their competitors. We’ve heard from many contractors that they’re seeing price differences of up to 20% between two vendors. This means running a quotation process is more important than ever. In fact, according to the AGC survey, 79% of contractors are taking steps to adjust their project plans, including sourcing materials from new suppliers, using alternative materials, or delaying projects altogether.
Quoting from multiple vendors can be time-consuming, though. Materials data from the BOM, field, warehouse inventory, and vendors (who are holding materials for release), such as material part numbers and specifications, need to be transferred and formatted into an RFQ. Each vendor will then need to be sent their own RFQ so they can’t see what the others are submitting. If this process is done in a disorganized fashion or doesn’t leverage any automation technology, it becomes quite challenging to draft and issue RFQs to a large number of vendors across all orders, and vendors might be less willing to partner with you in the future. - Comparing and negotiating quotes:
The work doesn’t stop at issuing the RFQ. Vendors have all sorts of ways for organizing and sharing their quotes and pricing sheets with contractors to make it difficult to compare their quotes against one another. That means a purchaser has to take all this information in different formats and find some way to compare each one with the other. Trying to compare line items across multiple vendor quotes and pricing sheets can be time-consuming and, again, is often skipped by contractors who simply lack the technology, tools, or processes to do the work at scale. In fact, according to a report by PlanGrid, 56% of contractors believe that productivity suffers due to poor data and communication among project stakeholders, including vendors.
What Great Sourcing Looks Like
Knowing when it makes sense to request a quote
Knowing when to request quotes for material purchase orders is crucial in order to get the best possible price and availability. Successful contractors have a clear understanding of the situations where it makes sense to do so, which allows them to save money on material costs without wasting time on unnecessary quoting. By defining these scenarios within their organization, contractors can strike a balance between quoting too often and missing out on potential savings. Below we outline a few practice scenarios where sourcing price and availability can lead to significant cost savings.
- Bulk orders
When buying materials in bulk, even a small difference of pennies between two vendors on one item can add up quickly. That's why it's crucial for contractors to source quotes and compare prices before making any large purchases. Best-in-class contractors take it a step further by calculating the total volume of material needed across all their current and upcoming jobs. By doing this, they can identify opportunities for significant cost savings and negotiate better prices with suppliers. This approach not only helps save money but also streamlines the procurement process by reducing the need for repeated orders. - Sourcing quotes before the job begins
Getting quotes on material purchases before the start of a project can be a smart move for contractors. Once the job begins, it can be difficult to slow down for anything, including sourcing quotes. By taking advantage of the time available before the project starts, contractors can identify bulk order opportunities for the entire job and obtain quotes for any materials that might be hard to source. This enables them to lock in good pricing in advance, especially for materials that are currently priced below average. - When there’s price uncertainty
Obtaining quotes is crucial if you're uncertain about the current price of a particular material. Relying solely on past experience with a specific vendor can lead to missed cost-saving opportunities. Prices for materials can fluctuate rapidly, so it's important to have a good understanding of the current market rate and distinguish between good and bad prices. - You don’t know who to buy from
In situations where uncommon materials are needed but there is no established vendor with competitive pricing and availability, obtaining quotes becomes imperative. By doing so, not only can overpaying be avoided, but also a better understanding of the market for that specific material can be obtained.
By understanding when it's best to source quotes for material purchases, contractors can save money on material costs without wasting time on unnecessary quoting. These scenarios should be defined within the organization to strike a balance between quoting too often and missing out on potential savings. Sourcing quotes for bulk orders, before the start of a job, in times of price uncertainty, and when dealing with uncommon materials without an established vendor can lead to significant cost savings. By implementing these strategies, contractors can streamline the sourcing process and negotiate better prices with suppliers.
Receive vendor pricing and availability digitally
Implementing technology to compare quotes is crucial for streamlining the procurement process and identifying cost-saving opportunities quickly. In fact, according to a report by the Fails Management Institute (FMI), a management consulting and investment banking firm focused on construction and real estate, construction firms that adopt digital procurement tools can reduce procurement costs by up to 10%.
Zach Ratner of BAR Electric uses a digital procurement tool for sourcing quotes and says, “We're seeing firsthand pricing immediately and receiving it right then and there [in our platform.] I would say we save about 5-15% depending on what items are being ordered.”
An out-of-the-box procurement software designed specifically for contractors can auto-populate quotes and pricing sheets on a digital dashboard. Prices on quotes, down to the line item, are organized and formatted, making it quick and easy to compare and determine the best vendor for each item. Within a matter of clicks, contractors can break out line items from the quotes to create individual purchase orders for each winning vendor. The purchase orders are instantly populated with the correct information and are now ready to be sent off.
While a procurement system is not required for streamlining the sourcing and quoting process, most best-in-class contractors have implemented some form of technology to scale their procurement process and stay ahead of the market. With automated quote comparison and digital purchasing tools, contractors can ensure they are getting the best prices and staying on budget.
Streamlining the RFQ Process with Automation
Sourcing materials is a crucial aspect of any construction project, but the traditional Request for Quote (RFQ) process can be riddled with inefficiencies. As a result, contractors do them less often than they should. Fortunately, technology can help contractors streamline the process and avoid delays caused by availability issues or missed opportunities to secure the lowest material prices.
Using procurement software equipped with a digital BOM provides project managers and purchasing agents with real-time job-spend and material-usage data that can be compared with original estimates. With this information readily available, they can promptly generate and fire off RFQs, streamlining the sourcing process, especially when issuing RFQs at the start of a job, when purchasing in bulk, or sourcing materials needed in the field whose best price and availability are uncertain.
A robust procurement software can automatically send RFQs formatted for each vendor, eliminating the need for manual creation of multiple RFQs. It can also hide vendor replies from each other, keeping the back-and-forth private. With streamlined automation, contractors can guarantee they receive quotes from a variety of vendors, which is more important now than ever before as the materials market has grown increasingly complex.
Implementing automation technology can result in significant productivity gains. According to PlanGrid’s “Construction Disconnected” report, 56% of contractors believe that productivity suffers due to poor data and communication among project stakeholders, including vendors. By automating the RFQ process, contractors can reduce communication errors and better manage project timelines.
Automating the RFQ process can bring many benefits. It improves communication and efficiency, leading to more accurate cost estimates, faster job completion times, and better project outcomes. It also makes RFQs a standardized process, with a central database that tracks all historical records of every RFQ issued. By having access to information such as when quotes were sourced, which vendor they came from, and the price and availability they offered, contractors can know for certain they’re doing their best to source in the best possible way.
