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Construction Purchasing & Supply Chain Management W. C. Benton, Jr. Linda F. McHenry New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitt...

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Construction Purchasing & Supply Chain Management W. C. Benton, Jr. Linda F. McHenry

New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. ISBN: 978-0-07-154886-1 MHID: 0-07-154886-6 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-154885-4, MHID: 0-07-154885-8. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. To contact a representative please e-mail us at [email protected]. Information contained in this work has been obtained by The McGraw-Hill Companies, Inc. (“McGraw-Hill”) from sources believed to be reliable. However, neither McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that McGraw-Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such servicesare required, the assistance of an appropriate professional should be sought. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.

Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2

Introduction to Construction Purchasing and Supply Chain Management . . . . . . . . . . . . . . . . Manufacturing Risks versus Construction Risks . . . . Types of Construction Projects . . . . . . . . . . . . . . . . . . Preconstruction Design and Contractor Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Management . . . . . . . . . . . . . . . . Risk Management . . . . . . . . . . . . . . . . . . . . . . . Critical Elements for Best Practice Construction . . . Supply Chain Management and Competitive Construction Operations . . . . . . . . . . . . . . . . . . . . Barriers to Supply Chain Management . . . . . . . . . . . Supply Chain Partnerships . . . . . . . . . . . . . . . . . . . . . Traditional Construction Supply Chain . . . . Benefits of Supplier Partnerships . . . . . . . . . . Risks of Supplier-Contractor Partnerships . . Joint Venture Supply Chain Partnership . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Construction Supply Sourcing Process and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Objectives and Activities of Construction Supply Sourcing ........................... The Supply Management Process . . . . . . . . . . . . . . . Supply Sourcing Dollar Responsibility .......... Competitive Pressures .................. Material Shortages . . . . . . . . . . . . . . . . . . . . . . Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Complex, High-Value Projects . . . . . . . . . . . . Potential for Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchasing and Competitive Strategy Linkage . . . . Competitive Strategy . . . . . . . . . . . . . . . . . . . . Supply Chain Strategy . . . . . . . . . . . . . . . . . . . The Project Sourcing Plan . . . . . . . . . . . . . . . . . . . . . . Purchase Order . . . . . . . . . . . . . . . . . . . . . . . . .

ix xiv 1 2 7 9 10 10 10 10 13 14 16 16 18 20 21 23 24 25 28 30 32 32 32 32 33 33 34 34 36 37 39

iii

iv

Contents The Subcontract Document . . . . . . . . . . . . . . . . . . . . . The Sourcing Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction Sourcing Documents . . . . . . . . . . . . . . Prime Contract . . . . . . . . . . . . . . . . . . . . . . . . . Purchase Order . . . . . . . . . . . . . . . . . . . . . . . . . Subcontract . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leases and other Agreements ............ Subcontracting versus Materials Purchasing . . . . . . The Subcontracting Sourcing Process . . . . . . . . . . . . Materials Purchasing ......................... Maintenance, Repair, and Operating Supplies . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4

41 42 43 43 44 44 44 44 44 46 47 48

Construction Supply Chain Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction Supply Chain Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subcontractor and Supplier Reduction . . . . . . . . . . . Four Dimensions of Supply Chain Relationships . . . . Supplier Relationship Management Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred Supplier Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . . Strategic Supplier Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . . Strategic Source Performance Review Process . . . . . Strategic Supplier Relationship Scoring System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 Supplier Profile Example ................ References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57 59 60 62

Construction Supplier Selection and Evaluation . . . Construction Purchasing Mistakes . . . . . . . . . . . . . . Construction Sourcing Success Factors . . . . . . . . . . . Sources of Supplier Information . . . . . . . . . . . . . . . . Strategic Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Criteria for Supplier Evaluation . . . . . . . . . . . . . . . . . Three Common Supplier Evaluation Systems . . . . . Categorical Method . . . . . . . . . . . . . . . . . . . . . Cost-Ratio Method . . . . . . . . . . . . . . . . . . . . . . Linear Averaging . . . . . . . . . . . . . . . . . . . . . . . Single versus Multiple Sources . . . . . . . . . . . . . . . . . . Advantages of Multiple Sourcing . . . . . . . . . Advantages of Single Sourcing . . . . . . . . . . . . Advantages of Dual Sourcing . . . . . . . . . . . . .

63 64 64 66 66 67 67 67 68 70 72 72 72 73

49 50 51 52 53 54 54 56

Contents

5

6

Long-Term Relationship Issues . . . . . . . . . . . . . . . . . Cross-Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . Supplier Reduction . . . . . . . . . . . . . . . . . . . . . . Grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hurdle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73 74 74 74 75 75 76

Purchasing Subcontracting Services . . . . . . . . . . . . Preliminary Subcontracting Planning ........... Subcontracting Source Selection . . . . . . . . . . . . . . . . . Preparation of the Bid Package or Request for Quotation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Components of the Bid Package . . . . . . . . . . . . . . . . . Pre-Bid Conference . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchasing/Supply Management (Large Construction Organizations) . . . . . . . . . . . . . . . . . Evaluation of Bid Packages . . . . . . . . . . . . . . . . . . . . . Submitting Bids by E-mail, Facsimile, and Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lump Sum Contracts . . . . . . . . . . . . . . . . . . . . Unit Price Contracts . . . . . . . . . . . . . . . . . . . . . Cost-Plus Contracts . . . . . . . . . . . . . . . . . . . . . Design-Build Contracts . . . . . . . . . . . . . . . . . . Negotiated Contracts . . . . . . . . . . . . . . . . . . . . Contract Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . Awarding Major Subcontractors . . . . . . . . . . . . . . . . Subcontractor and Supplier Quality Assurance and Quality Control Expectations . . . . . . . . . . . . . Strategic Construction QA and QC . . . . . . . . . . . . . . Change Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77 80 80

95 98 99 100 102

Construction Equipment Planning, Purchasing, and Leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Requisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company Goals and Objectives . . . . . . . . . . . . . . . . . New Market Niche Ideas . . . . . . . . . . . . . . . . . . . . . . . Cash-Flow Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . Economic Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . Example: Motor Grader . . . . . . . . . . . . . . . . . . Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Plan Analysis . . . . . . . . . . . . . . . . . . . . . . . .

103 105 105 105 108 109 109 112 112

80 83 85 86 86 86 88 90 90 91 93 93 93 95

v

vi

Contents Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenditure Control . . . . . . . . . . . . . . . . . . . . . . . . . . . Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposal of Capital Equipment . . . . . . . . . . . . . . . . . Purchasing New versus Used Construction Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

8

Construction Supply Chain Complexity, Profitability, and Information Sharing . . . . . . . . . . Construction Supply Chain Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Sharing . . . . . . . . . . . . . . . . . . . . . Project Execution . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118 119 119 119 124 125 127 128 129 140 142 143

Construction Supply Chain Management Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public and Private Sector Heavy Construction and Horizontal Supply Chain Models . . . . . . . . . . . . . The Components of the Heavy Construction Supply Chain Model . . . . . . . . . . . . . . . . . . Public versus Private Construction Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supply Chain Document Flows . . . . . . . . . . . Supply Chain Coordination and Information Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supply Chain Money Flows . . . . . . . . . . . . . . Private and Public Sector (Vertical) Construction Supply Chain Models . . . . . . . . . . . . . . . . . . . . . . . Supply Chain Document Flows . . . . . . . . . . . Supply Chain Coordination and Information Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supply Chain Money Flows . . . . . . . . . . . . . . Implementation of Construction Supply Chain Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

161 162 162

A

Joint Venture Agreement

......................

163

B

Subcontractor’s Bid Package and Pre-Bid Invitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

173

145 145 147 154 154 155 155 156 160 160 160

Contents C D E

CD 300, Standard Form of Tri-Party Agreement for Collaborative Project Delivery . . . . . . . . . . . . . .

191

Standard Form of Agreement Between Owner and Contractor for Integrated Project Delivery . . . . . . .

197

Construction Manager At Risk Contract . . . . . . . . .

205

Glossary

.....................................

209

.......................................

233

Index

vii

About the Authors W.C. Benton, Jr. is the Edwin D. Dodd Professor of Management and Distinguished Research Professor of Operations and Supply Chain Management at the Max M. Fisher College of Business at the Ohio State University where he teaches courses in purchasing/supply management manufacturing planning and control, operations analysis, and facility design to undergraduates, MBAs, and doctoral students. Dr. Benton earned his B.S. in Business Administration at Texas Christian University, Ft. Worth, Texas, and received his doctorate in both operations and systems management and quantitative business analysis from Indiana University, Bloomington, Indiana. His research and writing accomplishments include more than 120 articles. He is the author of two books. Dr. Benton’s expert contribution to the business and governmental arena includes consultancy for Grant Hospital, Ashland, IBM, RCA, Frigidaire, the Ohio Department of Transportation, the Florida Department of Transportation, the Indiana Department of Transportation, the South Carolina Department of Transportation, the Alabama Department of Transportation, the Kentucky Department of Transportation Cabinet, the Federal Highway Administration, Battelle Institute, the United States Air Force, Gelzer Automated Assembly Systems, Bitronics, Inc., the Ohio Rehabilitation Services Commission, Bio-Ohio, the Carter Group Canada, and others. He currently serves as a panel member for the engineering and manufacturing divisions at the National Science Foundation. He also serves on the board of directors for the Healthcare Accreditation Colloquium, Inc., the Sleep Medicine Foundation, the House of Hope, the Supply Chain Research Group, and others. Linda F. McHenry is chief operating officer for Benton and Associates, a construction management and engineering training firm. Ms. McHenry received her BA in political philosophy from Wellesley College, Wellesley, Massachusetts. She earned her law degree at Indiana University, Bloomington, Indiana. She also studied accounting and business administration at the Ohio State University. Ms. McHenry is admitted to the practice of law in four jurisdictions––Ohio, Indiana, California, and Michigan (inactive). Ms. McHenry was formerly an attorney for the Dow Chemical Company, Midland, Michigan, where she was responsible for advising 10 product groups. Later she was assistant general counsel at ITT-O. M. Scott-Burpee, Marysville, Ohio. At ITT-Scott, Ms. McHenry also served as manager of corporate planning with overall responsibility for the annual business plan cycle and presentation to the president of ITT. Ms. McHenry is the project manager for training programs presented by Benton and Associates. She is responsible for program and creative design and also offers courses on entrepreneurship, how to purchase legal and other professional services and construction law. Ms. McHenry has authored more than 18 construction educational manuals developed specifically for state departments of transportation and the Federal Highway Administration in Indiana, Kentucky, South Carolina, North Carolina, Alabama, Mississippi, Tennessee, Georgia, Florida, and Ohio.

Preface

C

onstruction Purchasing & Supply Chain Management is an authoritative guide that provides proven strategies for the construction supply chain management (CSCM) function. The material in this book explains how to achieve maximum integration with upstream and downstream supply chain members using the latest methodologies and technologies. It is also a comprehensive step-by-step guide to CSCM that is intended to help project owners, design engineers, architects, prime contractors, subcontractors, suppliers, and construction managers involved in construction projects throughout the world establish a strategic framework to meet the budgetary and scheduling goals of any project. This book can be used to teach the fundamentals of construction purchasing and supply management in a logical, simple, and concise format in construction management courses designed for undergraduate business and civil engineering students or for construction management graduate students. CSCM focuses on strategies for Lean construction including just-in-time purchasing, supplier evaluation, subcontractor selection, subcontractor relationship management, equipment acquisition, information sharing, and project quality management. The treatment of CSCM in this book is extensive and complete. There are more than 70 illustrations and ready-to-use forms. The construction industry has changed in its complexity over time. However, the primary objective of the industry is basically the same as it was 100 years ago: to build co...