Construction inventory management: 5 steps for success

The construction trade has long been defined by the just-in-time (JIT) inventory method. This creates a reliance on the immediate availability of materials at any given job stage. 

The advent of COVID all but obliterated the JIT model as supply chains broke down, operational restrictions were enforced, and materials became scarce. While JIT has served the construction industry well for decades, the disruption felt was a signal that it’s time for a new model and a new way of thinking.

Like other industries, construction was forced to implement change at a fast-and-furious rate. Some companies temporarily shifted to a just-in-case (JIC) inventory, stocking as many products as possible to guard against stockouts. 

And while many were able to pivot on a dime and stay afloat, longer-term planning, beyond just technology upgrades, is required to ensure business viability this year and beyond. The following guide has helpful tips from two leading experts to jump-start your planning.

Planning starts with a new mindset

The JIT method all but eliminated inventory management from the broad construction business model. For example, common practice for general contractors was to purchase inventory as a job progresses—typically relying on big box stores (think Lowes and Home Depot) for JIT purchase of materials. 

This model makes it difficult to perform job costing and reporting accurately because inventory is purchased during construction rather than expensed against existing inventory. The pandemic's supply chain disruptions further skewed costing and reporting because of material scarcity and delayed work.

The pandemic and its ensuing impact on the construction industry are impetus for change. Inventory management experts Mario Nowogrodzki, CPA.CITP, CEO, and Keith Fileccia, COO, at Mendelson Consulting understand the challenges construction clients face and the planning required to ensure growth and prosperity moving forward.

The following list serves as a starter guide to help prepare your business to be more agile and prosperous in today’s business environment.

Step 1: Change your mindset and embrace inventory management

Historically, inventory management has not been part of the construction industry’s language. The JIT model precludes inventory management because materials are expensed at the time of purchase. While a convenient practice, it also hinders accurate job costing and workflow.

Nowogrodzki explained: “As construction companies grow, it’s to their benefit to stop relying on third-party suppliers for materials in the just-in-time model. Consider a small contractor with a renovation job. The contractor purchases materials upfront, which can lead to higher pricing before even billing for work. This problem is fixed when contractors practice proper inventory control—buying and storing materials upfront and then expensing them when used. This now provides proper tracking of inventory and supports extremely accurate job costing and reporting.”

From a deeper accounting perspective, many within the construction industry must comply with what is termed “percentage of completion accounting” per the IRS. Nowogrodzki explained that this is only possible when inventory tracking is done properly.

For all of these reasons, a change in mindset is required. The time has come for the construction trade to view itself as an inventory-management-driven industry to manage a more agile enterprise.

Step 2: Develop a resilient (rather than efficient) supply chain

An extension of the tip above, this step is about rebalancing supply chains toward resilience versus efficiency (as with JIT). This includes building inventory, securing critical materials and long-lead items, and identifying alternative suppliers. Building a “back-up” network of vendors will better protect businesses in times of crisis.

This can also include increasing off-site construction by identifying vendors to manufacture prefabricated components in controlled environments. This is a good alternative to onsite production and can be more cost effective. A few examples of standard prefabricated assemblies include steel sections, concrete, walls, and roof trusses.

Step 3: Bulk up your workforce

Labor shortages have long been a pain point in the construction industry. The pandemic placed even more strain on an already stretched-thin labor market. As such, shoring up your labor market is recommended. Planning initiatives for building up your workforce can include:

• Identify alternative sources for labor: Look beyond traditional recruitment efforts to safeguard against shortages. Ask for referrals within your existing workforce, regularly review specialized job online job boards, and use construction temp agencies and search engines.
• Invest in training: Well-trained employees tend to be more in tune with their roles and expectations. A regular training regimen promotes consistency, which fosters higher levels of security and job satisfaction.

• Provide regular, positive feedback: People want to be managed, and providing consistent input is part of good project management. When employees understand their strengths and weaknesses, it helps them improve and become even more of an asset.

• Engage in best practices: Adhering to industry best practices helps with overall efficiency and profitability and enables businesses to proactively identify areas for improvement to continually enhance workplace conditions—and by extension, employee morale. Simplify payroll with automated tax filings and improved cash flow control with Assisted Payroll from QuickBooks.

Step 4: Adopt new and safer ways of working

A strong focus on safety has many positive outcomes, starting with making employees feel important to the organization. Employees who feel valued by the company are more inclined to follow safety procedures, which leads to fewer accidents and injuries while also boosting productivity.

Consider also providing employees with the proper personal protective equipment required to perform their duties safely and confidently while on the job site. Taking proper safety measures will help to retain workers longer term.

“Keeping your people safe should be a top priority,” said Nowogrodzki.

Step 5: Automate inventory management

Automating inventory management is the key to heightened efficiency and eliminating time-consuming manual tasks within an inventory-driven industry like construction. Processes within the vertical, from a small renovation to large-scale construction, are complex. Contractors deal with an array of construction materials (from raw materials and consumables to prefabricated products) and are often managing multiple construction sites at any given time. As such, the need to automate inventory counts and inventory transactions, as well as streamline storage locations, work orders, and purchase orders using a powerful and streamlined inventory management system, is critical. The ability to do so adds immense time savings, higher profit margins, and a fortified bottom line.

Automation begins by adopting the right technologies, starting with inventory management functionality that can seamlessly integrate with your accounting system in real-time. The ability to automatically sync data (critical functionality) between software solutions better positions construction professionals for proper asset tracking, job costing and reporting, and management of inventory levels overall.

Let the planning begin...

While not an exhaustive list, the tips offered in this guide provide the construction industry with a good starting point to begin planning. With ongoing uncertainty around the pandemic and economy, redefining business needs and building an organization that is agile is required if the construction industry is to rebound and gain momentum over the next several months.