During the project timeline, any goods that are purchased make up an inventory of materials and supplies that are later utilized to progress construction according to the design plan. Inventory control is a continuous balancing act in which contractors weigh the cost of the inventory with purchase costs, order costs, holding costs, and unavailable costs. These costs are closely related, and small gains or reductions in each element can result in paradigm shifts across all four cost types.
In this article, an Asheville construction lawyer will discuss these four cost types and how they relate to inventory control. Remember, it’s vital that contractors can work within project budgets and employ all of the tools and strategies necessary to avoid contractual disputes with owners.
According to an extensive report on project management for construction published by Carnegie Mellon University, the purchase cost of an item is “the unit purchase price from an external source including transportation and freight costs.” Bulk purchases typically receive significant discounts, so the per-unit price decreases substantially as quantity increases. Another important purchase cost factor is homogeneity, which means you can reduce costs by purchasing identical items such as bricks that are the same size and color as opposed to materials with high variance. Reducing the total number of purchases made can also help contractors reduce purchase costs.
The administrative expenses associated with procuring an order from an outside supplier are known as the order costs. These costs include requisition expenses, investigating alternative vendors, writing purchase orders, receival costs, inspection costs, and recordkeeping. In the grand scheme of your project, order costs should only account for a small portion of your total costs.
Capital costs, handling, storage, obsolescence, shrinkage, and deterioration make up the holding costs (or carrying costs) of a construction project. Essentially, holding costs are those costs that come as a result of storing and maintaining inventory. Moving and protecting inventory, especially in bulk, can lead to heightened holding costs depending on the facilities at the contractor’s disposal. When juggling multiple projects, contractors may find that large inventories can disrupt other projects from reaching completion. Therefore, it’s vital that contractors manage their inventories and timelines carefully. Holding costs can be challenging to predict, and it’s easy to overlook costs associated with insurance, taxes, and fire hazards related to your stored inventory.
Lastly, unavailability costs are another unpredictable factor of inventory control that can quickly derail a project without proper foresight and planning. These costs are associated with materials that are unavailable or out of stock. Sometimes referred to as stockout or depletion costs, material shortages can delay projects from being completed, which can lead to contractual disputes. Fortunately, an Asheville contractor attorney can assist you with avoiding such a dispute. Otherwise, you can try to reassign tasks to bridge the gap until more materials become available.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.