Resource Allocation and Resource Leveling - Construction Project Scheduling and Control - page 149

inspection roles; use of owner purchase agreements; acceptable bidders' or suppliers'
list; and extent of prefabrication (Construction Industry Institute, 1988b).
Some authors (Ahuja, Dozzi, and Abourizk, 1994; Hendrickson and Au, 1989)
have identified four materials cost categories, as follows:
1. Purchase costs : Purchase costs are what the vendor charges for the materials,
including transportation and freight costs. Usual practice is for vendors to give
a volume discount as well as an incentive for prompt payment. For example,
the invoice may have the term 2/10 NET 30 , which means a 2% discount if the
bill is paid fully within 10 days of the delivery date or the full amount is due
in 30 days. After 30 days, interest and/or a penalty may apply.
2. Order costs : Order costs are the administrative costs for preparing the purchase
order, which may not be a simple task, because it may involve making requi-
sitions, analyzing alternative vendors, writing purchase orders (with required
specifications), receiving materials, inspecting materials, checking on and expe-
diting orders, and maintaining records of the entire process.
3. Holding costs : Holding costs include held capital (interest or lost opportunity)
and handling, storage, obsolescence, shrinkage, and deterioration costs. Many
of these costs are difficult for the project manager to predict, especially those
that involve high-tech items, such as computers and computerized equipment.
Insurance and taxes may be added to the holding costs as well.
4. Shortage (unavailability) costs : A shortage cost is the cost (or the loss as the
result) of not having the required materials on the job site when needed. Short-
ages may delay work, which may result in the loss of labor resources or may
delay the entire project.
Theoretically, there are two extreme materials management theories:
1. The just-in-time theory , which calls for delivering materials at the time of
installation only. Thus, materials are not stored at the site.
2. The inventory buffer theory , which calls for all materials to be purchased,
delivered, and stored on-site prior to installation.
The advantages of the first theory are less handling, no storage, no frozen
capital, and less vulnerability to theft, vandalism, obsolescence, shrinkage, and
deterioration—in other words, fewer handling costs. The disadvantages are higher
order costs (more orders) and higher shortage costs (higher probability of not
having materials on time). Conversely, the advantages of the second theory are lower
purchase, order, and shortage costs. The disadvantage is higher holding costs.
In real life, the general contractor must strike a balance somewhere between the
two extreme theories in order to obtain the least total costThis balance will vary from