Optimising Costs in Construction

01 Dec 2020 Long Read

CW connects with procurement experts of leading construction companies to delve into their current approach towards cost optimisation and the role of digitalisation in monitoring purchase and tracking consumption patterns.

Cost escalation is a serious challenge faced by the construction industry.

Fluctuations in material and labour costs often lead to cost escalations in construction projects. Consider the current scenario: Steel companies have recently hiked prices for wire rods and TMT bars to Rs.42,750 and Rs.39,000, respectively. Cement manufacturers are likely to hike the price in Q3FY21 or after the festive season. Lack of optimisation of construction equipment also plays an important role in increasing costs of infrastructure projects. Against this backdrop, companies have been adopting various procurement methods to control costs.

Approaching cost optimisation

The current times pose various challenges for construction companies in purchasing construction materials and equipment. Highlighting a major challenge in finalising and buying equipment, Gauraw Tiwari, General Manager - Mech, Dilip Buildcon, says, “This is the time to be extremely specific and selective on choosing the aftermarket backup for equipment. We should negotiate. Most companies want to be in the market to meet the challenges. They do not have a major hit on equipment cost because they are compensating the cost in aftermarket revenues. So we have to negotiate for aftermarket and service support backup, among others.”

In terms of what works better for Dilip Buildcon between maintaining an equipment fleet and hiring, Tiwari says the company believes in minimal hiring of equipment. “The top management has a thought process to bring out efficiency better than any other subcontractor. And why not, especially considering we have a huge fleet and technically equipped and qualified manpower? We can maintain equipment better and have better negotiations for aftermarket parts as well as services and equipment cost.”

In the case of construction materials such as steel, prices did see a drop during the initial pandemic months, but have again been rising now. Was there an approach to secure additional contracts when prices dipped?
Amit Chaturvedi, Senior Manager - Purchases, HG Infra Engineering, responds, “Our management is quite focused on planning and the general practice is to secure contracts to try and maximise the inventory and cover the inventory on our side so that we incur minimum cost on the additional costing that is actually incurred.” However, he adds, “During the initial COVID months, when prices did see a drop, we were unable to plan because of the uncertainties. But at the moment, the management is highly focused on planning and we ensure that at least one month’s stock is available in our inventory.”

To optimise cost of construction as well as control quality, Ratan Lal Kashyap, Senior Vice-President - Procurement, GR Infraprojects, initiated the process of backward integration for self-sufficiency and established eight manufacturing units for the company. “There is risk involved even when you run through the market and select from the best vendors,” he shares. “For instance, emulsion is a binder and it contains water and bitumen. So when transported, any driver could manipulate, mitigate or contaminate it, and the purpose is defeated.” That’s when the company took the decision to make these products itself. “We started with the emulsion unit. The idea was to get the product as per site requirements,” he adds. The company also has its own tankers to deliver the material to its construction sites. Further, with GPS installed, the sites have exact information and status on the driver. “Having these units and manufacturing these products ourselves add a good amount of control in the entire business and you have the flexibility to change as per the market. We are working on a couple of more products because it helps you cost control, improve quality, get the material delivered in time, and undertake value engineering.”

While Kashyap believes this could be the way forward, he also emphasises that one has to keep in mind economies of scale. “Putting up these units will have a break-even cost; if you are not able to meet them, it could be a loss-making proposition. So it’s a business decision.”

Controlling wastage of materials and movement of machines
There tends to be major wastage of construction materials such as cement, concrete and steel on site. This wastage may also depend on the type of construction—whether it is a building or an infrastructure project.

PS Ravindra Yadav, Head - Supply Chain Management, Gayatri Projects, says, “Generally, the wastage acceptable in terms of purchase and actual execution in percentage terms of total project cost would be 3 per cent for steel and 1.5-2 per cent for concrete. In the case of steel, the major issue is in the offcuts, which we are unable to use, and this is not in our control.” However, he shares that the general practice is to cut to length directly or customise lengths during purchase. This is a control mechanism purchasers are developing. Depending on the volume of purchase, he says, “If you have larger volumes to buy, there is an option for steel where you can directly deploy machines on the site itself. This can save you a lot of wastage. However, in the case of smaller volumes, you cannot set up a complete plant.” In most cases, Gayatri Projects outsources to reduce the wastage of steel. However, in the pipeline segment for irrigation works, the general practice is to do it inhouse. “We manufacture pipes by buying customisable lengths of plates and customise the thicknesses so that wastage is reduced. For concrete as well, we have developed an inhouse software, Einsite, which monitors day-to-day usage, giving us a clear picture of the requirement and enabling us to reduce wastage.”

In terms of equipment, it is crucial to ensure complete transparency on movement of machines on site. But the question is, how?
Tiwari from Dilip Buildcon approaches this in two ways: one is the overall planning of the equipment at the project level; the second involves the monthly, weekly or daily plans to be executed. “At the project level, the equipment has to be planned in a phased manner,” he says. “There should not be scarcity of equipment and there should be proper synchronisation of equipment.” He elaborates with an example: If you are doing some earthwork, for which you have deployed an excavator of 30 tonne capacity, a motor grader of 12 tonne capacity and at a 5-km lead, you have deployed only two or three tippers. So, the resource synchronisation of the equipment and its effective utilisation will not be great. He adds, “At construction sites, a lot of activities are interlinked. So every day, we sit with project heads to understand the work that needs to be executed for the day and prioritise accordingly. At the project level, there is automatic software helping us monitor our requirement and the availability of resources.”

Further, as Yadav mentions, Gayatri Projects has developed Einsite. Through this plug-and-play software, the company tracks vehicular movement, data is captured from across machines and the software offers an understanding of the amount of raw materials and machine time used. “Launched in 2017, the software was adopted to get complete equipment insights and track utilisation,” he elaborates. “Eventually the software was developed further and today it is fully integrated right from the machines with the batching plants, transit mixers, pavers and dumpers—all of it is interlinked. Going a step forward, we have adopted a progress monitoring software as well. So now, Einsite is a complete real-time monitoring software that can give you real-time insights.”

Monitoring purchase and tracking consumption patterns
There is massive competition in the market with a fast growing number of vendors, leading to more scope for quality procurement. /

Speaking of HG Infra Engineering’s approach to ensure cost savings, Chaturvedi says, “Owing to an increase in the number of vendors, there are better possibilities for negotiation and developing new vendors. We use the SAP system and try to develop more vendors to create single procurement. This helps us develop more rates and competition among the vendors as well. They provide better rates to bag orders from us and this creates an opportunity for us to negotiate.” The company takes more than 10 quotations. Also, it ensures regular quality checks. “We focus on quality, quantity, rate and the number of vendors. This gives us a great advantage to procure at lower rates.”

While efficient inventory management is crucial, digitalisation and technology are playing a key role in tracking consumption patterns.

Sharing GR Infrastructure’s approach in this direction, Kashyap says, “Today, for most infrastructure companies beyond a size, it is a business requirement and you need to have these tools to have proper business controls.” GR Infraprojects uses SAP S/4HANA, which is the latest version; the entire business is controlled through it. Also, there is a tool, Laserfiche, which is used for DMS. Additionally, a regular analytical tool is used to analyse the total inventory. In the case of inventory control, there is a common tool platform where all the sites can see what is in surplus and at which site. He adds, “In between, we had a huge logistics issue; to overcome this, we tied up with B2B logistics companies. You just need to go online and book the consignment; they get it delivered within a specified timeline. This helps me optimise some amount of inventory.” Going forward, the company plans to opt for B2B integrations because most vendors are on SAP. This will make the system more transparent, mitigate unnecessary communications, and give a clear timeline for receiving the inventory. What’s more, as Kashyap shares, “We have decided to offer an AMC to the vendor. He holds the inventory at the sites and, based on the requirement, the inventory is consumed. Plus, this comes with an uptime guarantee.” He also informs that the company is now trying to incorporate the barcoding system through which one can opt for proper tracking of inventories. In addition, the transaction also becomes seamless.

Evidently, an effective and robust plan for procuring materials has been keeping these companies ahead in the race. Negotiation is one aspect. But whether it is equipment, aftermarket parts or any consumable civil material, the focus is on the lifecycle cost of the equipment or component and related value-added services. Further, they are open to embracing newer technologies, from monitoring tools to future-savvy products.


Collated from views shared in a recent CW online panel discussion on ‘Cost Optimisation in Construction’.

To share your views, write in at feedback@ConstructionWorld.in

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