How Construction Fleet Companies Can Combat Cost Increases
Originally appeared in Construction Executive
The construction industry, like most industries, is facing challenges. The biggest concerns for construction fleet companies this year continue to be related to material costs, supply chain disruption and worker shortages. In fact, contractors anticipate the cost of projects across most building segments to increase by up to 63%, according to the Associated General Contractors of America’s 2022 Construction Outlook Survey.
These three components—supplies, suppliers and staff—are vital to construction fleet companies. The AGC survey notes a perfect storm of challenges in these areas, in part due to continuing conditions from the COVID-19 pandemic:
- Ongoing supply chain obstacles. In 2021, 90% of construction firms had some sort of significant supply chain problem. In response, organizations have turned to alternative suppliers (61%) and supplies (48%) or accelerated purchases after winning contracts (67%).
- Nationwide worker shortages. Although 74% of construction companies intend to increase headcount in 2022, contractors struggle to find skilled laborers—despite 88% of firms raising pay, incentives or benefits in 2021.
- Canceling or postponing projects. Last year, 65% of companies had to hold off work or stop it altogether, with almost one-third (32%) saying they have not rescheduled. Nearly half (48%) of all projects postponed or canceled in 2021 were due to rising costs.
To help alleviate these issues, last November, Congress passed the Infrastructure Investment and Jobs Act. While this legislation promises positive momentum, there is still the question of filling vacancies. The industry needs to gain about 650,000 more workers in 2022—on top of the normal pace of hiring—to meet the high demand, according to Associated Builders and Contractors. As a result, contractors are struggling to keep up with the high demand for work.
Amid today’s economic climate, prices continue rising with no end in sight. Construction fleet companies may not have the ability to effect change in all areas, but they can optimize areas of the business impacting their bottom line: procurement spending and payments.
OPTIMIZING PROCUREMENT SPENDING
Within fleet procurement, the best way to manage expenses is to start with a spend analysis, consolidating historical purchasing data to build insights and answer foundational questions. To do so, review purchasing orders from a full year, collecting all the fixed and variable expense data. Next, categorize every supplier and expense, which will allow for an analysis of where consolidation is possible and how to obtain maximum savings.
Throughout this process, ask these key questions:
- Why are we making these purchases?
- Are all our locations purchasing under the same terms, pricing and processes?
- Who are our preferred suppliers and why are they preferred?
- Are we utilizing national account programs?
- Are our suppliers charging a fair price?
- Are our suppliers driving program and operational compliance?
- Can we cut costs and save time?
- Can we consolidate suppliers, maintain local supplier relationships and drive out additional administrative and operational costs?
- How can we do better?
The overall goal of a spend analysis is to decrease procurement costs, improve efficiency and increase visibility and transparency into processes. These objectives align well with the two top strategic priorities for chief procurement officers—cost reduction and supplier sourcing and relationship management—according to PwC’s 2022 Digital Procurement Survey.
One approach to address both priorities is to partner with a group purchasing organization, or GPO, which provides consistent, transparent, competitive pricing from a pre-negotiated national supplier network for tires, parts, supplies and more. Companies with multiple locations can benefit by reducing off-contract spending. For construction procurement, collaborating with a GPO can lead to significant cost savings on negotiated goods and services.
Another area to consider is accounts payable and accounts receivable, especially since the construction industry historically has relied on outdated invoicing systems and manual processes. When payments fall behind, a company’s cash flow suffers, drying up funds for other projects and causing delays. Invoicing systems need to evolve so cashflow does not adversely affect projects.
Chief financial officers and their teams have used these financial challenges as a springboard to implement digital innovations that will enable long-term improvements to their organizations’ payments operations. In fact, 71% of CFOs have increased their use of digital payments since 2020, according to a PYMNTS.com and Corcentric report. Among the benefits of embracing technology that CFOs cited are improved working capital (84%) and maintaining a healthier balance sheet (59%).
CFOs from businesses that have invested in more digital payments operations believe these efforts will result in stronger financial reports, whether improved in working capital, streamlined AR and AP processes, or improved customer and partner satisfaction.
AN ADDED BENEFIT
Another result of optimizing procurement spend and payments is access to valuable analytics, which drive smarter decisions. Data-driven solutions can uncover valuable insight, improve project outcomes and reduce risk. Along with assessing market conditions and project performance, it leads to better decision-making.
The construction industry, which traditionally has been hesitant to embrace digital and the potential of technology, is missing out on the benefits. Data provides the ability to collect, analyze and apply information that helps complete projects on time, bid more accurately, mitigate risks, overcome unpredictability, improve equipment productivity and maintain a safe workplace that is essential with worker shortages.
During a time when many factors are outside the control of construction fleet companies, prioritizing efficiency and cost-savings is a must. By enhancing procurement processes, supplier relationships and payments digitization, organizations can help lower supplier costs, process larger quantities of invoices and payables, as well as have access to valuable reporting and analytics.
At Corcentric, we stand ready to help any fleet bridge that gap. To learn how we can help, contact Corcentric today.