The power of Additive Project Management
1. We are short on cash, largely because clients take a long time to pay
2. We are struggling to find enough skilled trades professionals
Additive Project Management relieves pressure on both points. Additive Project Management can reduce cash spent on material that is tied up in the operating cycle by 50% and is documented to increase field productivity by 18% or more. It also provides an opportunity to reduce your material costs and increase quality control, but it does come with a cost. It requires the project manager to accept complete responsibility for serving the field’s needs. That is a culture shift for many contractors, which is no small feat.
Executing Additive Project Management is nuanced, but the goal is summed up in this statement: Make sure the field has what it needs, when it is needed, and empower the field to stay focused on installing material.
Under Additive Project Management, the project manager anticipates the field’s needs and coordinates with vendors to deliver material and equipment just before it is needed. This requires the project manager to forecast the field’s material and equipment needs, communicate these needs to vendors, and release only the material needed for a short period. A “short period” is typically less than one month, but this can vary depending on the job.[1] While the field is working through one period’s material, the project manager visits vendors to inspect next period’s material before it is delivered to the job site. Any errors are corrected before the material is delivered. The project manager carefully tracks progress on the job and communicates with vendors to release the next period’s material once he has as much information as possible about what will be needed.
There are many reasons we favor this strategy, which is why we frequently write about it. One of the most motivating is an improved cash position. We’ll explore how Additive Project Management improves your cash position in the next section and then look at how it increases field productivity, which effectively increases your supply of skilled labor.
Relieving the cash crunch
Let’s first look at how we can decrease cash consumption in a given period and increase cash on hand. Common practice is to release around 70% of the material at the beginning of the project and have it delivered to a lay down yard or fab shop. Consider a project that has $875,000 in projected material costs that is scheduled to be completed over the next 12 months. Vendors typically bill when material is delivered to the job site. If we release 70% of that material up front, that’s $612,500 worth of material for which we will have 30 days to pay.[i] Under the best of circumstances, we will collect payment for this material from our client in three or four months. That’s a full quarter that we must self-finance this cash expenditure. If we instead release only what is needed for the first month, and we assume that the material breaks out in equal amounts each month[2], then we will release $72, 917 worth of material in the first month.[ii] That’s $539,583 that stays in our firm’s bank account for a little longer when compared to releasing 70% of the material up front.[iii] Even if we release two months’ worth of material, we will be billed $145,833[iv] and we will still have $466,667[v] more in our bank account compared to releasing 70% up front. We will release a little more material each month and the sum of our cash expenditures will increase with each release, but we will also start collecting on the first pay apps in three to four months. The cash coming in is often equal to or greater than the cash going out by the time we start collecting on pay apps, so our firm is out of pocket for roughly four months’ worth of material, or $291,667[vi] over most of the project’s life instead of being out $612,500 up front. We cut the amount of cash spent on material that is tied up in the operating cycle by half.
A legitimate counter-argument to this strategy that we often hear is: “I can bill the client once the material is on site, so it doesn’t free up any more cash to order in smaller batches.” True enough. And we get to book the billings as revenue.[3] But…we have very little control over how long clients take to pay. There are two pieces that determine the time it takes to recover cash: when we spend the cash and when clients pay their bills. We can exercise some control over when we spend the cash, but we have very little control over when clients choose to pay their bills. There are too many variables in play that we cannot control. The client may take longer than expected to pay, or something might delay a billing (e.g. a failed inspection, improper paperwork, arguments over completion percentage, etc.). We can effectively decrease the time it takes our firm to recover cash and improve our cash position by releasing smaller amounts of material in a given period. The average amount of time between spending cash on material and receiving cash from our clients is known as the Cash Conversion Cycle (CCC). As we saw in the previous paragraph, reducing the CCC has a positive impact on our firm’s cash position. In fact, investors often use the CCC as a measure of quality for a firm's management. A shorter CCC indicates higher quality management.
Now let’s look at how metering material flow to the job site can increase material delivery accuracy. We often hear: “Our vendors backorder material and cause delays even when we release most of the material at the beginning of the project. We need them to deliver everything as soon as possible so that we have the material available when it is needed.” And that’s a fair point. But…it ties up more cash than necessary and, more importantly, it doesn’t solve the problem of knowing you have the material. We know we have a pile of material that is something like what we will need, but material deliveries larger than one month's worth of work are too large to properly review for accuracy on most projects. We have been surprised by vendors delivering something different than what we ordered enough times that we now insist on inspecting the material at the vendor before it is delivered to the job site.
Most incorrect material delivery incidents are not malicious or underhanded in our experience. It is most often due to poor communication. Even purposeful substitutions are often the result of good intentions. On one project we ordered twenty (20) 1-1/2" x 1-1/4 reducing branch tees, meaning that the "bull's nose" was a 1-1/4" size while its "horns" were a 1-1/2" size. The vendor sent, instead, twenty (20) 1-1/2" tees with twenty (20) 1-1/4" reducer bushings. The logic was that connecting the bushing to the tee would, in effect, create the reducing branch tee as requested. The tee and bushing combination was a lower cost than the reducing tee we requested. The vendor was trying do us a favor by reducing our material costs. However, the substituted material meant that out crew would be required to solder twenty (20) additional joints, creating the potential for twenty (20) additional leaks, while also increasing the injury risk twenty-fold. This would have increased our labor costs well above the savings on the material, increased the opportunity for future leaks, and increased risk to field personnel. The vendor may have made the substitution in good faith, but it would have increased our job costs and decreased the quality of the installed material. Because we insisted on inspecting the material before it was delivered, and built in enough of a time-buffer to correct such mistakes, we had the opportunity to correct the substitution before the material was needed for installation (more on the formula for calculating the time buffer in later posts).
Metering material flow to the job site is also useful when material needs change as the job progresses. The plans and specs have been updated in a way that changed the needed material while a project was in progress on nearly every job we have worked.[4] Releasing material only just before it is needed prevents costs associated with handling unneeded material.
Metering material flow to the job site can also reduce overall material costs. The amount of material that is lost, damaged, or incorrect is greatly reduced when releasing what you need only when it is needed. One interesting experiment in Denmark found that this “Just-In-Time” (JIT) material handling method resulted in a 3.6 percent reduction in material costs that was directly attributed to reducing lost and damaged material:
Everywhere reductions in the materials consumptions were immediately registered at the same time as productivity and quality increased. A higher degree of workers' safety on the construction site and a much higher morale among all participating workers, foremen and contractors was noticed as well. …the total savings…was 9 percent of the net building costs, divided into 18 percent on the labour costs and 3.6 percent on the materials (Bertelsen and Nielsen 1997).
Increasing skilled trades professionals’ productivity
The academic literature has reported for over 20 years that about one third of field hours are spent handling material.[5] This means that rather than installing material, workers in the field spend 30% or more of their time moving, organizing, searching for, and replacing lost or damaged material. Having only the material needed over the next month or so greatly reduces the amount of material that our skilled trade professionals have to deal with. This alone can greatly increase the field’s productivity. In the JIT study referenced above, labor costs on the project decreased 18 percent compared to constructing an identical structure using traditional material handling methods.
We agree that prefabrication is another obvious response to this inefficiency. We went all-in on prefab, just as much of the industry has, and we experienced the same problems that even the best practitioners of prefab are struggling to solve. We were constantly frustrated by not having enough information early enough to prefabricate, we were frustrated by the rework often required to fit prefabricated components, and we were frustrated by increased cash outlay needed to operate the prefabrication shop.
Additive Project Management reduces labor costs and increases worker safety without the expense and coordination pitfalls of prefabrication. After being frustrated by prefabrication, we started sending unassembled material in "kits" to the field, packaged with material spools to show how the parts should be assembled. We call these kits “prefab evolved”. They offer the labor-saving benefits of prefab without the costs associated with a fab shop, including the storage and transportation costs required for prefabricated components. These kits have the potential to increase the labor savings well above the 18% documented in the JIT study. Skilled professionals in the field open the box, look at the picture, and install the components in the box according to the picture.[6] There is no need to spend time looking for material or walking back and forth between the installation site and the lay down yard. These kits retain two important benefits that prefab concedes:
1. The flexibility to install components as needed on the site without the rework prefab often requires, and
2. The improved cash position achieved by releasing material in smaller batches mentioned in the first half of this article
Stated another way: Releasing material in kits decreases costs compared to prefabrication while capturing most of the labor saving benefits.
We were already working closely with vendors to get material releases down to two weeks or less, so it was a small step to have the vendors package material in kits before delivery. This requires close coordination with vendors, and we have found that vendors are willing to take this step to differentiate themselves and earn our business.
Conclusion
Additive Project Management offers several compelling benefits that are elusive with currently popular material procurement methods:
1. Improved cash position that decreases the time between spending on material and receiving payment from clients (i.e. a reduced Cash Conversion Cycle)
2. Decreased material cost from reduced material consumption (less lost, damaged, and returned material)
3. Increased field productivity and safety
These benefits come with the cost of project managers serving the field’s needs. We believe the benefits are well worth the costs. In fact, we developed a free website that facilitates Additive Project Management starting with the procurement process. Pricebuyflow.com allows you to build material lists and communicate the lists to vendors. The website allows you to tag each piece of material with the specifics of that material need, including the location it will be installed, the date it is needed, the intended usage of the material (e.g. cold domestic water supply), the plans and specs the material is taken from, etc. You can email vendors for quotes from within the website. Vendors will receive your material list along with the information you included. Vendors can quote the material within the software and are required to provide an important additional piece of information: Can each piece of material be delivered on the specified date to the specified location? Vendors must select “Yes” or “No” before submitting a quote. If the answer is “No”, the vendor must specify when the material can be delivered and how much lead time is needed.
Pricebuyflow.com only includes plumbing material, but we will expand it soon. The information you enter on Pricebuyflow.com is viewable only to you and the vendors you choose to send the material lists too. Feel free to sign up for a free account and give it a try. The free account is needed to create sign-in credentials and make your material lists and quotes viewable only to you and the vendors you choose to share them with.
We built Pricebuyflow.com to encourage Additive Project Management and we invite you to give it a try. Feel free to reach out to us if you have any questions about the website or Additive Project Management in general.
-Steven Stelk, Ph.D, FP&A, Financial Strategist, Cycle Rate Performance
-Michael Farley, CEM, President and CEO of Cycle Rate Performance
-Steven Stelk, Ph.D, FP&A, Financial Strategist, Cycle Rate Performance
-Michael Farley, CEM, President and CEO of Cycle Rate Performance
[1] We like to get down to one week when the job will support it.
[2] This assumption is made for computational ease and we recognize that it is unrealistic. We invite the reader to experiment with the numbers and verify that the concept holds even if the material needs are not equally distributed over the project’s life.
[3] Changing bonus incentive structures that are based on revenue would go a long way towards fixing the chronic cash shortfalls in construction firms and we will discuss this topic in a future article.
[4] Notable exceptions are hyper-planned industrial jobs that are executed to the model as exactly as possible, such as manufacturing facilities. Commercial and light industrial construction is not often planned or executed this way in our experience.
[5] This is the earliest study of which we are aware that documents the 30% figure:
[6] These kits must be developed with input from field personnel.
[6] These kits must be developed with input from field personnel.
[i] $875,000 x 0.70 = $612,500
[ii] $875,000 x 1/12 = $72,916.67
[iii] $612,500 - $72,917 = $539,583
[iv] $72,916.67 x 2 = $145,833
[v] $612,500 - $145,833 = $466,667
[vi] $72,916.67 x 4 = $291,667
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