Despite being one of the largest ecosystems, construction is an industry that typically performs with slim margins (5% earnings before interest and taxes), as well as low productivity improvements (1% per annum for the past 20 years).
Coupling this with the external challenges faced across industries at the moment including the aftermath of COVID-19, the war in Ukraine, and a general slowdown in new projects, construction companies are looking to procurement to drive change.
In addition to financial pressures, construction bares the weight of ensuring that it is meeting sustainability goals. Currently, the industry is directly responsible for 40% of CO2 emissions and indirectly responsible for 25% of all greenhouse gas (GHG) emissions, most of which come from Scope 3 suppliers and operating the built environment.
As such, McKinsey’s insights highlight the importance of optimising procurement to accelerate the decarbonisation of the industry and become a more profitable and competitive industry in the future.
Procurement and the construction industry
With procurement accounting for 40 to 70% of a company’s total spend, construction executives see the function as a trusted business partner, one that can help to double down when it comes to navigating uncertainty.
Despite this understanding, construction is failing to keep up with other industries when it comes to the implementation of best practices. Largely this is down to external challenges, including limited project specification control, complex projects, and fragmented supply chains. There are also some internal challenges too such as a decentralised project-by-project mindset.
Those that have been able to overcome these challenges have seen better financial results with some margins that are 5 to 10% higher than those who lag behind. It is also believed by CPOs that consistently applying best-in-class procurement practices can generate savings of as much as 12%.
Driving sustainable change in the industry
In addition to the financial benefits, procurement will play an integral role in decarbonising the construction industry. With 90% of construction emissions coming from Scope 3, combined with procurement being the main interface between construction and its value chain, CPOs will be vital when it comes to reducing CO2.
By elevating the role of the CPO in this way, construction companies can take the function beyond being a trusted business partner, transitioning into being a strategic function.
Near-term considerations for procurement
- Create transparency when it comes to the CO2 footprint
- Gain a granular understanding of all materials and suppliers for projects
- Help to manage trade-offs
Longer-term considerations for procurement
- Securing access to green materials
- Anticipating future shortages of materials
- Developing strategic decision-making and demand forecasting beyond current project pipelines
- Increase integration with suppliers and help them to decarbonise
- Develop talent and expertise
- Leverage roles and mandates
- Gain a more granular understanding of data and market intelligence
“As the main interface with the construction value chain, the procurement function will need to excel in its dual mission of improving profitability in a volatile environment and meeting sustainability targets. In doing so, procurement will be elevated to new heights as it emerges as a strategic function. CPOs who act now can help their companies lead the sustainability transition and position themselves as attractive partners to leading developers in the future,” commented McKinsey.