In an EPC project, there can be two procurement strategies namely -

1. Buy all the items at the front end and get them monetized as agreed in the contractual agreement. Then invest in holding these materials till they are consumed by the construction activities.

2. Buy items in batch mode meaning buy a fixed amount of material today and then the next batch of material can be procured after a few months. Here holding costs is low as one will need a smaller warehouse.

Similarly in an EPC project, there can be 2 construction strategies namely-

1. Go serial-wise, complete one milestone then take another milestone and then take the next.

2. Go parallelly, by doing work at many places by having more labor and completing all the activities of the project at a faster speed.

I was consulting an EPC contractor and they had selected a strategy of buying all the material upfront for procurement and going serial-wise completion of milestones for construction. Initially, after procurement things looked very smooth as the entire procurement was monetized by the customer. The problems started later as the contractor had hired very few labourers and was attempting serial-wise completion of milestones in the project. The contractor was facing problems with engaging labour contractors as the number of labourers required was less and customers were not happy with the progress of construction work, so they started stopping the cash flow of the contractor. All this led to bad taste between the contractor and labour contractors. The contractor had to keep finding new labour contractors after 2-3 months of association. If we estimate the non-value adding time in this activity then in a six-month duration, at least 2 months of time was wasted. Also, since it was serial-wise work the amount of work completed was less and the customer was not happy. The holding cost of the warehouse kept increasing and ate the profits which the contractor was getting from scale buying of components.

In the above case, if the construction strategy of doing all the activities of the project parallelly had been chosen, the labour contractors would not be disengaged as the customers would be happy with the progress and there would be less probability of cash flow problems in this case.

I would like to conclude this article by sharing learning that with a particular procurement strategy we should align an appropriate construction strategy otherwise we will be inviting a lot of friction in execution as well as depleting bottom-line numbers.

Have you experienced any such misalignment between procurement and construction activities? Please share in the comment section.