In construction, material costs are a significant component of the overall project budget, but managing these costs effectively requires more than just securing the best prices. In many ways, the act of paying for materials is only just the beginning.
Materials logistics—the planning, handling, and delivery of materials from suppliers to the job site—play a critical role in controlling expenses. In fact, one study estimates that logistics costs for a given material account for 27 percent of the total purchase amount on a project. Understanding and optimizing key logistics costs is essential for maintaining budgetary control and achieving successful project outcomes, but they can be slippery. What are these costs, where can they be found, and what makes them hard to grasp? Here are four important logistics cost types, what the typical snares are when attempting to control them, and what you can do to respond.
Inventory Costs
What They Are
All costs associated with keeping materials in a storage, and the maintenance of that storage facility, are considered inventory costs. This could include a storage space on the site itself, or a third-party, intermediary warehouse—wherever materials are delivered to the jobsite from. Costs in this category could include the labor costs of paying handling and administrative workers, rent and insurance for an off-site location, losses due to damage, and handling equipment like forklifts.
What Makes Them Tricky
What makes inventory costs difficult to get a firm handle on is the concept of buffer stock. To avoid the undesirable consequences of construction delays, keeping a sufficient stock of materials at all times to maintain work continuity is highly desirable. If important components are not delivered to the inventory location on schedule, inventory costs fluctuate greatly with the work associated with responding to shortages. On the other hand, large cash outlays to secure buffer stock can seem risky or unrequired, leading to internal disagreements on what such figures should look like.
Procurement Costs
What They Are
Procurement costs relate to the business activities that occur before and during the material purchase process. This category involves researching possible suppliers, identifying and communicating with key partners, reviewing and comparing quotations, and negotiating contract terms.
What Makes Them Tricky
What makes these costs tough to harness is that many projects don’t track them in the first place, so there is little precedent for attempting to optimize them. It’s easy enough to track the wages and office supplies for a procurement department, but this is an oversimplification of the true price. Late fees, customs, taxes, processing fees, rush delivery fees, restocking fees—all of these costs are present in most projects, but vary greatly because material types and amounts vary by project, and are often affected by supplier relationships. Some estimates hold that procurement costs typically range from 2.5 to 5 percent as a portion of all purchasing expenditures for a project, so the costs here are present, but often murky to project leaders.
Site Storage Costs
What They Are
When materials arrive at the construction site, generally speaking, they are unloaded at a temporary storage area before being moved to their final location. The expenses associated with these actions are site storage costs. Sometimes, the process requires cranes, lifts, loaders, or belts, as well as basic materials such as palettes or tarps.
What Makes Them Tricky
What makes tracking site storage costs troublesome is the abstract way that they can have a large effect on project efficiencies. If there is inadequate space on site for material storage or the space is located in a bothersome location, the resulting worksite congestion and confusion can affect the productivity of anyone trying to get around the jobsite. Tracking the costs associated with a lack of efficiency caused by site congestion, however, is an opaque task, so the true costs often remain unknown.
Transportation Costs
What They Are
Everything that takes place between the supplier point of origin and the warehouse, as well as the warehouse and the jobsite, falls into the category of transportation costs. The components of this category often include truck driver wages, inspection charges, fuel, loading equipment, and resources used during transportation, such as padding or storage racks. Sometimes, however, if the materials are arriving from overseas, these costs can become far more complex.
What Makes Them Tricky
On the surface, determining transport costs may seem simple—at first blush, the main calculations seem to be assessing distances to establish routes. However, transport costs are in fact, very challenging to determine because many of them are hidden. It’s common for manufacturers to include delivery charges integrated into an invoice, so construction companies pay for transport costs as part of the cost of the material itself. If a material is commonly delivered directly to the jobsite (and not through an inventory warehouse), it is extra tough to know a project’s transportation costs.
How To Mitigate Logistics Costs
Great project efficiencies and increased profit margins can both be gleaned through alleviating logistics costs on a large construction project. By taking logistics seriously, watching their costs closely, and being hyper-aware of the risks involved, many of the pitfalls and unknowns mentioned above can become advantages to be gained.
One easy way to take control of logistics costs is by partnering with a Logistics Service Provider (LSP), whose experience and expertise can lift a project’s logistics from a weakness to a strength. For instance, an LSP can take the entirety of a project’s inventory costs, streamline them, and simplify them as a flat rate. The same goes for site storage costs, where an LSP dedicated to the task eliminates any possibility of site obstruction or miscommunication issues. When it comes to transportation costs, an LSP can greatly reduce spending by separating these costs from material purchases and removing the markup involved.
Curious about how an LSP can help your business or project? Reach out to Trangistics here to discuss how you can gain efficiencies, avoid risk, and cut costs. Or, to check out an example of Trangistics in action, check out our latest industry article here.