Managing Escalating Material Substitutions Costs

Identify Material Substitutions and Their Impact

First, project teams should work to identify potential problems before they become a serious risk.

• From the earliest stage of talking to your trade partners, facilitate ongoing conversations about materials. The trade partner is closer to their supply chain; they can tell you in greater detail what their particular concerns are. Listen to them. Make sure to talk through potential challenges, and adapt as needed. This proactive strategy will go a long way toward preventing and mitigating the impacts of materials issues.
• Know and understand the specifications and contractual requirements. In addition to the absolutely necessary practice and discipline of reading the full specs and contract, this understanding can also be augmented with technologies that allow project teams to "chat" with their contract to identify specific requirements ad hoc. Consider the value such a tool could bring in terms of errors avoided.
• Understand what has been approved through the submittal process, and then go on to cross-check the deliveries of materials against those approvals. Pay close attention to submittals that have been returned and marked "Approved as Noted." Be sure your trade partner has addressed these notes prior to material release.
• Trust but verify. As an extension of the earlier discussion about supply chain challenges, project teams must work closely with the trade partners to track materials as they make their way to your site. This may take the form of ongoing conversations, but there should also be documentation to back up what you are hearing, and you should be provided with that documentation in the form of emails, invoices, etc. A material tracking log will serve as a baseline to organize and prioritize these conversations.

Monitor Material Substitutions

The next step is diligent monitoring as materials arrive on the site. Project teams must develop methods to accomplish the following.

• Know not only the type of materials expected, but also know the quantity. What is supposed to arrive on the site today, and how much of it? Either the wrong material or the wrong quantity of material can be a serious red flag that should not be ignored.
• Have a robust process for acceptance of materials that provides the aforementioned cross-checking. In most of the industry, this is still a manual process, but tech solutions to assist in this process are emerging.

Understand the Reasons for Material Substitutions

At the first sign of a variation from what is expected, work to understand what is happening and why via a deep dive on root causes.

• Was it a simple accident or error?
• Is the trade partner struggling to acquire the right material?
• Is the trade partner struggling to buy enough material?
• Is your trade partner in financial distress? If so, is this stress localized to the current issue (i.e., caused by the escalation), or are there other larger factors in play? In other words, do you need to solve for this specific one-off problem? Or does the problem extend to this trade partner overall?

Perform Risk Mitigation

Then assess the options to mitigate the risk.

• It may be possible to discuss the problem you are seeing with the trade partner and never have the problem again; I have seen it many times. Just bringing the problem to their attention, letting them know you are aware and watching, can solve a lot of problems. So, to drop another common saying, "If you see something, say something." Have the conversation, provide notice if appropriate, and document all of it.
• If the problem requires more, once you understand the nature of the challenge, work together with your trade partner to make a targeted risk mitigation plan for that specific challenge.
  • Is the challenge financial? Explore options for direct purchase or whether the trade partner is owed a change order to address the escalation.
  • Is the challenge related to supply chain issues? If so, are there alternate suppliers? Can you work through the approved substitution process to arrive at a material that is more readily available?
  • Is the challenge labor-related? Is your account being well managed? Has the trade partner lost a key team player? Is there someone new or less experienced managing your account? Explore whether there is someone on their team they trust to take the reins. Alternately, you may decide to assign a project resource to help manage alongside your trade partner's team.

Of course, all these items are best understood and addressed proactively. Cultivate a focus within project teams on prevention, early risk identification, and targeted solutions. Having up-front conversations to identify potential challenges allows you to put those same risk mitigation strategies in place in advance and avoid the problem altogether. All of this may seem like a lot of extra effort on the part of an already busy project team, but, as Abraham Lincoln is attributed to have once said, "Give me 6 hours to chop down a tree, and I will spend the first 4 sharpening the axe."