As Builders Seek Work-Arounds, Is It Smart To Source, Buy Direct?
2022 Context:
This is a tough time to be a subcontractor. Price increases that occurred once per year are happening frequently, and unexpectedly. Products are not available when you want them, nor in the quantities that you need. Your builders are yelling for more products and denying your request for another price increase. What do you do?
Stuck between price increases from distributors and a builder slow to accept the new pricing, is your depleting margins. One strategy, knowing that builders are slow to accept the next price increase is to pad the previous increases so that margins ride higher than normal. Another strategy is to slow pay your distributors and keep some cash to pay your workers, who just got another raise from you.
This might be a good time for the builder to start paying the distributor direct. It’s possible that some of the price increases, and part of the product unavailability, trace to your subcontractor not paying his bills on time, or has been difficult to work with; frequently changing suppliers, ordering at the last minute, changing his order once placed.
The benefits of Buying Direct
Conversion of construction subcontracts to unit pricing reveals new opportunity. After that important pivot, a fresh review of your prices – and costs – can expose real benefits from buying some materials directly from a distributor or manufacturer.
This new conclusion, away from the comfort zone of the way things have always been done, can come with a host of doubts. When I went through it myself, a hit parade of "what-ifs" arose that troubled me.
- What if we end up paying just as much as when the subcontractor procured materials?
- What if we buy materials and they get damaged or stolen?
- What if the wrong materials get delivered, or partial shipments unexpectedly arrive?
- Who will do the ordering?
- Who will receive and sign for shipments at the job site? Who will sign invoices?
These are legitimate questions. However, that doesn't mean they should derail you from the goal. Instead, these valid concerns can help you design a stronger, more rigorous process.
Trial and error led to a system we could rely on in the field. This system meant installers would be required to receive material at the site, verify shipped quantities, and sign for the shipment. Close collaboration with your subcontractors and suppliers – with them 100% onboard in the development process -- is critical.
Our industry is still a local business. No matter how big your company is or how big your distributor or manufacturer is, procurement strategies designed to control costs are best when the local – on the ground – level sets the model.
[Editor's Note: You can order and receive free shipping and a signed book from Ken Pinto's author website: www.howmuchisthemilk.com/shop/ ]
You don’t need to buy all materials directly to gain control of costs, but it will prove beneficial in some cases. Even mutually beneficial.
I once procured roof tile to help a subcontractor stay in business (cash flow and credit issue). He demonstrated his loyalty to our company by supplying his best crews to our jobs. He did the ordering and managed the receipt of materials on the site. All we did was issue a purchase order with the quantity of materials agreed upon with the installer and pay invoices when delivery was complete.
I recommend, when possible, to have the installer receive and sign for Builder Supplied Materials (BSM), but there are a countless number of process combinations to meet the needs of all involved.
Savings examples depend on where your starting point is, but here is an example of savings my team captured, right out of the blocks:
- Paint – $350
- Drywall -- $510
- Stucco -- $180
- Roof Tile -- $400.
Your best subcontractors will work with you to mitigate 99% of the risk in procuring materials when they know your heart is in the right place. Done right, a procurement process developed with the full cooperation of your installers, distributors, and manufacturers will strengthen, not weaken, your relationships.
These enhanced relationships are where you will realize the most significant savings, not in a flash after some big sourcing event, but over time with suppliers you trust.
Identify the product categories where you have the best working relationships with suppliers and subcontractors. For example, I did not implement a single Builder Supplied Materials (BSM) initiative without their complete support. Tough-guy strategies don’t work here.