Procurement costs, which account for 40-70 percent of a construction company’s spending, could be reduced by 12 percent by refining procurement practices, argues a new report
Procurement costs could be reduced significantly with the implementation of best practices, a new report from McKinsey & Company (McKinsey) has found.
The construction industry is responsible for around a quarter of global carbon emissions, with ‘The strategic era of procurement in construction’ identifying key areas of carbon inefficiency as the production processes of the ingoing materials and the energy efficiency of the structure through its lifecycle.
Procurement is the perfect place to intercept and resolve inefficiencies
As 90% of emissions for construction companies are Scope 3, the report argues that procurement, as the main interface with the construction value chain, should be in the driver’s seat to reduce the carbon footprint of construction projects and meet corporate sustainability targets.
McKinsey suggests that procurement teams have the best understanding of the intersecting demands of sustainability and cost and therefore are in the best position to secure the most sustainable suppliers, materials and technologies.
Reducing procurement costs will be a collaborative effort
As the urgency of achieving net zero becomes more necessary, the report finds that there is a strong opportunity to reduce procurement costs and inefficiencies in the construction value chain.
In the near-term, procurement teams are advised to create transparency and estimations for the CO2 footprint across the value chain, gaining granular perspective on costs and emissions from different materials and available suppliers.
Greater interactions with engineering and project management teams to find and prioritise solutions that drive profits and sustainability will also be necessary.
The report identified three key themes:
1. Talent and expertise
Construction companies will need new expert roles focused on collecting reliable information, guiding, and recommending trade-offs between alternative materials and technologies – tailored to each category and project – assessing design simplifications against impact on value and assessing risks / assessing unproven approaches.
2. Roles and mandates
New roles should not only be embedded in the procurement organisation, but also integrated closely with engineering and design functions and project teams to drive recommendations or alternatives, optimize trade-offs between profitability and sustainability targets, as well as securing access to scarce materials (potentially recommending M&A opportunities).
3. Data and market intelligence
Procurement teams will need to collect and curate reliable information on the different existing alternatives. This should be built in partnership with suppliers but will require to build own databases, conduct research, and even perform tests when needed. This must be complemented with new digital tools to collect, display, and interpret data.
Chief procurement officers (CPOs) have the opportunity to be the main drivers of sustainability and profit
Erik Sjödin, partner at McKinsey said: “The role of the CPO in construction companies is at an inflection point. Those who act now will position themselves as attractive partners to leading developers in the future in making cost and sustainability trade-offs, identifying the most sustainable suppliers, and securing access to many sustainable materials and technologies that will be in short supply.
“This strategic element will put construction company CPOs in the driver’s seat as they navigate the dual mission of improving profitability in volatile times whilst decarbonising construction.”
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