Strategies for Material Delivery and Price Escalation Risks on Collaborative Delivery Projects

The pandemic has impacted not only our day-to-day lives but it is forcing us to reexamine long-accepted approaches to how collaborative delivery firms specify and procure materials and equipment for our projects. A global scarcity of shipping containers, skyrocketing shipping rates, clogged ports, and shortages of manufacturing components are driving firms to evolve their procurement approach to avoid long lead times and escalation charges.

Gone for now are the days when quality and price were the two primary drivers for equipment and material selection. Firms and owners are now putting greater emphasis on other factors such as manufacturing location, delivery methods, material availability, and fabrication lead times when selecting materials and equipment.

Reductions in manufacturing capacity and displacement of skilled workers have created challenges for suppliers aiming to be competitive and meet their customers’ needs. Further, unprecedented volatility in material pricing is requiring suppliers to use a crystal ball when forward pricing their goods. Materials such as pipe, wire, conduit, and stainless steel have experienced multiple price escalations and ordering backlogs. This has put stress on collaborative delivery firms who hold fixed-price contracts with extended project schedules. Risks for bidding new long-term projects have also increased.

Project teams and owners can employ some basic strategies to minimize schedule and escalation risk. Most of these strategies are not new, but the supply chain crisis has amplified their significance.

Avoid Customization Where Possible

One of the most basic strategies starts with the design. It has always been true that customizing a standard equipment offering adds a cost and time premium to the submittal and fabrication process. Moreover, this premium has become magnified in the current supply chain bottleneck. Although it’s not always possible to specify manufacturers’ off-the-shelf equipment, standard products can be used with little or no impact to form or function. Project teams should resist the urge to customize basic pieces of equipment by adding custom bells and whistles such as non-standard motors, special coatings or materials, or specialized controls. Taking such an approach will significantly impact the availability and fabrication times of your equipment. Also, before finalizing the design, a review of the equipment specifications with prospective suppliers should be conducted to identify requirements or features that could add to your delivery times. Informed discussions can then be held with the owner to decide whether any non-standard features are worth the schedule and cost impacts.

Consider Points of Origin and Delivery Methods

Manufacturing location has taken on heightened importance in the selection of materials and equipment. Shipping prices have more than doubled while cargo is sitting in port two to three times longer than pre-COVID. Additionally, labor shortages in the trucking and railroad industries have extended delivery times far beyond pre-COVID levels and should be considered in preparing a procurement and construction schedule. In developing your equipment selection and procurement strategy, discussions should be held with vendors regarding their supply chain, manufacturing location, and delivery method (ship, truck, rail, air). Such pre-plannning may influence selection of a particular vendor over another who may have a better price but either cannot meet your delivery requirements or presents a high risk of shipping delay.

Evaluate the Risk of Pre-purchasing

Another strategy is pre-purchasing materials and equipment prior to design completion in order to ensure that a minimum supply is available when your work begins. Some firms have shifted from “just-in-time” delivery to ”just-in-case” stockpiling of materials. While pre-purchasing materials prior to design completion imparts risk to the project, the latter strategy is being used as a hedge against supply shortages, extended lead times, and price escalations. This approach has worked particularly well for commodity items such as pipe, rebar, wire, conduit, and basic process equipment that doesn’t require extensive maintenance when stored for long periods of time. Pre-purchasing a slightly smaller quantity of materials than are anticipated in the final design can help ensure that key materials are on site when construction begins, with any remaining material being purchased when the design is completed. For relatively common equipment and materials, the risk of possibly needing to adjust or retrofit these pre-purchased items post-design may be acceptable in order to lock down pricing and secure a place in the manufacturing queue. Additionally, in exchange for improving lead time, some suppliers may accept advance down payments on factory capacity so they can reserve a manufacturing slot even before submittals are prepared.

Streamline Your Submittal Process

Submittal reviews can be a step in the procurement cycle that impacts your schedule in deceptively small bites. Reviews should be conducted with the minimum number of re-submittals. Poor submittal quality can add weeks to the review and approval process. To avoid this, pre-submittal review meetings with suppliers will help answer questions, minimize comments, and improve the quality of the submittal you receive. Further, a thorough examination of the submittal requirements in your equipment and material specifications can be very effective. Ask yourself if all the information requested is really necessary to ensure you are getting the quality product you expect. Oftentimes specifications require suppliers to provide a considerable amount of boilerplate information, certifications, qualifications, etc., which may not be necessary to review and approve the products you wish to purchase. A “scrubbing” of your submittal requirements may reveal some non-essential information which could be eliminated or obtained later without holding up your review cycle.

Contractual Strategies

In fixed-price or progressive design-build procurements, it can be many months from when a design-builder provides its GMP proposal to when material and equipment procurement begins. Many collaborative delivery agreements have historically shifted the risk of material escalation entirely to the project team once a contract is signed. However, unprecedented and erratic price escalation may drive project teams to include excessive contingency to address this risk.

To bridge the gap between proposal date and when actual work begins, owners should consider incorporating escalation clauses or use indices such as the Producer Price Index (PPI) for project components which are demonstrating high volatility and unpredictable escalation. Examples include the use of indices for materials that have escalated erratically since COVID such as ductile and stainless pipe, PVC conduit and fittings, and copper. By addressing these costs separately from the fixed price and allowing them to be adjusted beyond the bid date, owners may get better pricing because bidders can reduce the amount of contingency being carried to account for escalation risk.

Conclusion

The construction industry has experienced intense supply chain volatility from the pandemic and collaborative delivery projects are no exception. Collaborative delivery allows project teams and owners to implement strategies, such as those listed above, to mitigate schedule and cost risks. As early as the project kick-off, the project team should be communicating and understanding the options for different procurement strategies. By working collaboratively and having dialogue about procurement challenges, effective strategies can be put in place to minimize the impacts of the current economic climate.

About Scott Thibault, PE, DBIA, Vice President - AECOM

Scott Thibault is vice president and director of operations for AECOM’s national water design-build practice. Scott specializes in the design-build (DB) and design-build-operate (DBO) implementation of water and wastewater facilities for both the public and private sector and leads a team of dedicated DB managers and engineers based in Chelmsford, MA. Scott is responsible for all aspects of project operations including proposal development, estimating, design management, procurement, contracting, quality control, financial management, and direct supervision of project management staff.
Topics: AECOM, Collaborative Delivery.

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