The right construction procurement strategy is critical to completing projects on time and within budget.
Procurement is the process of acquiring new products and services for a construction project. To the layman, it may sound like just a fancy word for buying something – but the reality is that while procurement is a simple concept, the scope of work involved with procurement management is wide and varied, making it a complex practice with many moving parts.
Construction procurement managers have to juggle a wide range of variables and factors when they land a construction contract, including client preferences, value for money, time constraints, risks, regulations, expertise, rebate agreements, accountability, environmental factors and much more.
One of the little-known secrets to improved construction procurement is better management of supplier rebates. Rebates often form part of a vendor’s building material sales strategy. A rebate is an incentive paid by vendors to buyers for the purchase of large volumes of materials. The vendor essentially pays you back a percentage of the money you have spent after you meet a specific threshold.
Managed well, rebates can lead to significant cost savings and improve the bottom line. Project managers who have a good rebate programme can reduce their total annual spend by thousands. Conversely, those that manage their rebate programme poorly – or lack one entirely – fail to maximise their profit.
To get better rebates from suppliers, we recommend a four-step process.
Step 1 – Kraljic Matrix Analysis
Begin by analysing the best materials vendors and procurement routes to get the highest rebates. You can use the Kraljic Matrix to do this. The Kraljic Matrix is a tool used in supply chain management to segment your vendors into one of four classes:
- Leverage items: These are materials important to the project manager. They are in abundant supply and available in low-risk markets.
- Strategic items: These materials are important to the company and are often sourced from risky or complex markets.
- Non-critical items: Non-critical materials have a low impact on the company and are in abundant supply from low-risk markets.
- Bottleneck items: Materials in this class have a low impact on the business but supply is not guaranteed.
These are plotted against the impact on profit and supplier risk. For example, are the items you are buying from a particular vendor scarce or abundant? What is the impact on your profit if you can’t get supplied with certain materials?
(Image source: bidwrite.com)
To run a Kraljic Matrix analysis, simply create a list of all your suppliers – you can categorise them if you need to – along with the amount you currently spend next to each vendor name. Next, give each vendor a score from zero to ten on their profit impact on your business and their supplier risk. Higher scores denote higher profit impact or supplier risk.
The idea is to identify suppliers with the highest profit impact but the lowest supplier risk. When you plot this on the Kraljic matrix, your interest is in the vendors that are in the “Leverage Items” quadrant. For these materials, there is an abundant supply – hence high competition – meaning you have the best leverage to go to these suppliers and have a discussion about rebates.
Step 2 – Quarterly Business Reviews for "Leverage Vendors"
The analysis in Step 1 should be conducted once every quarter. Have a formal meeting with the potential vendors. As ever in the construction industry, negotiation skills are key. Get the vendor to agree to a rebate upon hitting certain volumes and offer to make them a “preferred supplier”. The targets should be both realistic for you and attractive for the vendor. Due to high competition, leverage vendors are likely to listen to attractive offers.
Step 3 – Implement
You have to make sure the vendors you have a rebate agreement with actually become preferred suppliers. For large contractors, this information must be disseminated throughout the organisation. All procurement staff must use the preferred suppliers and not source materials elsewhere.
Quite often, you will see staff members going to different suppliers depending on who they like in terms of the ordering process or those they relate well with. This can negate the potential gains made through preferred supplier rebate programme and must be prevented from happening.
A good enforcement method is to feed it into your procurement system. Preferred vendors should be clearly marked as “Preferred” in the system so there can be no confusion. Staff should also be trained on the impact of preferred suppliers in the overall construction procurement strategy. This ensures all staff are on board and are willing to do what needs to be done.
Step 4 – Monitor and Manage
Generate reports in your procurement system to show you which users are spending outside of your preferred vendor list and speak to them. Keep constant track of how much you have spent with each vendor to make sure that you get the rebate and have all evidence readily available to back up your claims.
Once you have made a rebate agreement with a vendor, get it in writing and monitor your progress against it. Some vendors won’t notify you when you hit the agreed volumes, so you need to take a proactive approach to rebate management.
How to Manage Rebates Effectively
While managing rebates has traditionally been done using spreadsheets to track volumes and analyse vendors, it is difficult when you are dealing with high volumes of materials and a high number of vendors – construction management would need to employ more staff just to manage the records and keep track of everything throughout the procurement process.
Spreadsheets are also prone to errors. If someone changes a formula or deletes a sheet, it can often take days or even weeks to work out the problem. Also, the more rebate agreements you have in place – each with their own terms, conditions, caveats, tiers and targets – there is a high propensity to miss something. To avoid having to deal with data integrity issues – and the integrity of the results – it is best to invest in a rebate management platform.
A rebate management software platform automates your rebate processes and calculations, eliminates errors and ensures you get all rebates you’re owed.
e-bate specialises in B2B rebate management. Our robust, purpose-built system – delivered as a SaaS, with a real-time calculation engine – is the ultimate rebate management solution for procurement leaders. For more information on how e-bate rebate management software can help you improve your construction procurement strategy, get in touch with one of our experts or request a demo today.
