The construction industry will see big changes in 2019, including an unpredictable supply chain, a difficult labor market and significant impact from new tariffs and rising interest rates. Contractors will also see a shift in demand as millennial customers look for emerging trends such as green and eco-friendly construction and new types of building materials.
Despite these significant challenges, 80 percent of contractors anticipate growth during the year and expect the value of projects on which they bid to increase by as much as 32 percent. The combination of expected growth as well as a labor shortage, the rising cost of materials, and unpredictable tariffs and interest rates is volatile. Construction executives will be looking for ways to deal with these challenges, improve their profitability and improve efficiency in an increasingly difficult market. As a result, effective project management and an efficient supply chain will become even more important to the industry in 2019.
The challenge is that construction projects are not one-dimensional. Construction companies cannot look at each project as stand-alone work; rather they are three-dimensional. For example, a purchasing manager may think the ability to save $0.05 a linear foot on pipe is an attractive deal. However, further investigation and a quick discussion with the project manager may reveal the supplier is always late or sends partial shipments. These behaviors extend the project schedule and cause the overall delivered cost from the supplier to be higher, despite the initial cost savings. Alignment is essential and company leadership, project managers and procurement teams must look to reduce cost-increasing project margins through synergies of volume, quality, schedule performance, vendor concentration and product distribution/logistics.
Sustainable building is a growing trend and we are seeing increased demand for environmentally sensitive or green construction. In response, the industry needs to explore new processes and materials including solar systems, sustainable indoor environment and water efficiency technologies, smart devices and construction materials such as hemp.
With the passage of the 2018 Farm Bill, commercial production of hemp will open the door to use of this material for things like "hempcrete," insulation materials and hemp oil-based wood finish and stains. There will be an increased demand for construction using these efficient materials which will initially be challenging to meet. Large-scale production of hemp and hemp-based industrial products are gearing up but the entrance of a relatively new building material into the mix will undoubtedly bring supply chain challenges.
As the industry explores the use of new, sustainable materials, project managers will need to make sure they have personnel on their teams who are knowledgeable in this area and capable of analyzing the value versus risk of deploying them—as well as comparing vendors in anticipation of a shakeup in the supply chain.
The need for project management has become more visible than ever in view of recent global tariffs and a highly unpredictable trade war. Project managers will need to be aware of new developments in these areas. Managers will need to constantly run new sourcing comparisons that take existing and new tariffs into account and re-evaluate sourcing decisions on a near-constant basis. Team members will need to be up to date on how these political realities impact their sourcing.
New tariffs on Canadian timber, steel and other construction materials used in residential and commercial construction will not only make all projects more-costly but they may also contribute to increased supply chain complexity as contractors seek out new sources of building materials.
New tariffs that may force construction project managers to re-evaluate their supply chains also mean they will have to take a fresh look at their purchasing, scheduling and logistics decisions. Already, shipping has presented a crisis to many in the industry with a shortage of drivers and increased regulation causing critical delays and increased overhead. In the face of new sourcing contracts, project managers will need to examine all logistical issues as well.
The construction industry may well be looking at an impending crisis as changes such as tariffs, labor shortage, shipping challenges and shifting demands continue to force major changes in project flow, necessary skills and vendor selection. However, in its current state, project management may not be up to the task.
Some of the greatest needs in construction project management include a higher skill level from the project managers and the existence of a "scorecard" to evaluate quality, service, timing and price for all contracts and vendors.
In addition, vendor selection, especially in the face of changing needs and fluctuating costs due to tariffs, needs greater optionality and constant re-evaluation. "Insider" sourcing, common in the industry, relies on decisions being made on the basis of familiarity rather than scorecard metrics. While this type of insider sourcing is widespread, it is vastly inefficient.
If done right—with attention to vendor selection, greater optionality and a detailed scorecard—project management will simplify supply chain complexity and unpredictability while simultaneously driving a multiple increase in profit of between 10 and 20 times current rates.
Applying the concept of Total Value Optimization (TVO) to project management delivers the necessary improvement and helps overcome critical challenges. TVO is based on a strategy of integrating the supply chain with representatives from all functional areas as well as external supply chain stakeholders, to achieve a common understanding of the value being created along the buy-make-move-fulfill supply chain.
Linking all activities into a single process increases supply chain value, including appropriate product for the job, logistical moves, shrinkage, productivity and schedule consistency. In addition, leveraging real-time analytic data to make fact-based decisions will drive sustainable margin improvements. Decisions based on real-time, accurate and unbiased data—as opposed to insider decisions—will further contribute to the overall profitability of the project.
Project management is more important than ever in the current, volatile market. Improving the foundation of project management through TVO, supply chain integration and a unified buy-make-move-fulfill process prepares the industry for consistent and meaningful growth in the coming years.
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