Is It Time to Leave “Just-in-Time” Behind?

When Facing Uncertainty, Flexibility is Key.

“Lean construction” has been a buzzword for a long time. It’s a principle that has long been held as the gold standard of efficiency. It’s also become increasingly difficult to maintain.

As the world struggles to find a new normal after the pandemic, the construction industry is facing challenges unlike any we’ve seen in recent memory. Runaway inflation threatens budgets, with price changes rendering some estimates obsolete within months. Supply chain issues make materials acquisition erratic and unpredictable. That unpredictability can inspire some to hoard resources, which creates problems of its own.

At our recent Market Outlook meeting, Jaynes met with industry professionals across disciplines, from owners to subs, to hear about the problems facing construction in this environment. From everything we’ve heard, here is our understanding of the problem…and what we’re doing to rise to the challenge.

What “Just-in-Time” Really Means

Lean construction draws from the same principles as lean manufacturing, a process first popularized by Toyota in the 1970s. The idea was to utilize “just-in-time” inventory systems, meaning parts and inventory were ordered only when there was a buyer for the end product. This cut down on the amount of materials that needed to be stored and minimized waste from buying more inventory than necessary.

The same concept applies to construction projects. Rather than ordering materials up-front, just-in-time principles would have each element of a job procured at the moment it’s needed.

In a lot of ways, this has been an efficient strategy, and many of the principles of lean construction – such as bringing all teams into alignment and cross-discipline collaboration throughout a job – continue to be important. But the just-in-time delivery approach has suffered a mighty blow over the past few years due to economic and political pressures affecting us all.

We’ve heard from our community partners that inflation and supply chain issues are working together to create a lot of uncertainty in bidding and maintaining project budgets. Inflation of 1% or more per month can quickly cause prices to balloon, and the ongoing supply chain disruption has been further exacerbated by a rail strike, the conflict in Ukraine, and other issues. Although it does seem that inflation is poised to slow, it’s unlikely to be a factor that will disappear overnight.

These issues affect everyone, but they put the most pressure on contractors working under a fixed-price contract. How do you bid competitively but set realistic expectations against a backdrop of ballooning prices and material shortages?

Managing Material Shortages and Cost Variation

Faced with uncertainty, we’ve encountered several companies who are employing more of a “just-in-case” approach to materials. Instead of ordering on a per-project or as-needed basis, they will acquire as much as possible when things become available. We certainly can’t fault anyone for this approach, but it does raise some problems.

For one, any kind of hoarding at scale by one group is bound to disrupt pricing and availability for everyone else, creating competition where there may not need to be any. More pressingly for many contractors, buying up materials as they become available has introduced logistical concerns like a need for more storage space.

There are also financial inefficiencies. If you end up not needing all the material you’re storing, it can be hard to free up space, and those dollars could often have been put to better use elsewhere.

One thing is clear: whenever possible, moving away from fixed-price contracts can certainly relieve pressure. Embracing the design-build construction process and inviting all stakeholders to share risk can help. Going in with a contingency plan and a willingness to be flexible with materials and methods can make a big difference, too.

The Project-First Approach

From our own experience and listening to others in the industry, it’s become clear that early involvement on the part of the general contractor can make a big difference in managing costs and combating supply chain disruption.

We advise a “project-first” approach, which begins by looking at the needs of the individual project and planning contingencies in the design stage. Prioritizing a building’s features to identify must-haves and non-negotiables first, then budgeting out the less vital elements, can help with budget adjustments once construction is underway.

Another option is to work with the owner to create a budget allowance. This means building some padding into your budget to allow for price fluctuations and inflation. If you come in under that allowance, the extra can be spent toward those “nice to have” features or go back into the owner’s pocket. Transparency, communication, and a relationship built on trust between owners, contractors, architects, subs, and any other stakeholders will ensure this goes smoothly.

We’d love to say that tough times are behind us forever, but there’s no way of knowing what the future might hold for our industry. What we do know is that building relationships and being generous with knowledge and insight is one way we can all lift each other up as we move forward. We invite you to reach out with your thoughts and questions so we can all work on being better together.