EDC Construction Supply Chain Report

R ESEARCH R EPORT
Supply Chain Dynamics and

Opportunities Analysis
Canadian Construction Sector
Global Trade Management Centre of

Innovation
December 2008
TABLE OF CONTENTS
INTRODUCTION ................................................................................................................................. 1
RESPONDENT PROFILE ......................................................................................................................... 2
1. GENERAL OBSERVATIONS......................................................................................................... 3
KEY OBSERVATIONS ............................................................................................................................ 3
CONSTRUCTION SECTOR SWOT ANALYSIS ......................................................................................... 9
2. SUPPLY CHAIN STRUCTURE.................................................................................................... 10
SUPPLY CHAIN MAP ........................................................................................................................... 10
CONCENTRATION OF POWER .............................................................................................................. 11
SUPPLY CHAIN MANAGEMENT PRACTICES........................................................................................ 12
3. TRADING DYNAMICS ................................................................................................................. 16
EXPORTS ............................................................................................................................................. 16
IMPORTS ............................................................................................................................................. 18
CANADIAN DIRECT INVESTMENT ABROAD ......................................................................................... 19
4. SUPPLY CHAIN DYNAMICS....................................................................................................... 20
UPSTREAM SUPPLY CHAIN OPERATIONS ............................................................................................ 20
DOWNSTREAM SUPPLY CHAIN CHARACTERISTICS ............................................................................. 23
KEY SUCCESS FACTORS ...................................................................................................................... 24
ADOPTION OF INFORMATION TECHNOLOGY ....................................................................................... 24
COMPLIANCE ...................................................................................................................................... 27
CRITICAL SUPPLY CHAIN RISKS .......................................................................................................... 28
5. FINANCIAL SUPPLY CHAIN...................................................................................................... 29
6. GAPS ANALYSIS ........................................................................................................................... 33
7. OPPORTUNITY RECOMMENDATIONS .................................................................................. 36
INVESTMENT IN CAPACITY/CAPABILITY BUILDING SOLUTIONS ......................................................... 37
SUPPORTING SUPPLY CHAIN EFFICIENCY ENHANCEMENT ACTIVITIES ............................................... 39
CONCLUSION .................................................................................................................................... 44
APPENDIX 1: SUPPLY CHAIN STRUCTURE .............................................................................. 45
APPENDIX 2: SUPPLY CHAIN PARTICIPANT CHARACTERISTICS ................................... 46
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SUPPLY CHAIN DYNAMICS & OPPORTUNITY ANALYSIS
EXECUTIVE SUMMARY
During the fall of 2008, EDC’s Infrastructure Sector Team, the Global Trade Management (GTM)
Centre of Innovation, the Canadian Construction Association (CCA) and several regional construction
associations collaborated in a qualitative study of the Canadian construction supply chain. The study
explored supply chain management practices and needs and included participants from all subsectors,
including: general contractors, trade contractors, road builders, heavy construction contractors,
manufacturers, suppliers and services providers. In all, 65 interviews were conducted.
General Characteristics
The Canadian construction sector is highly fragmented and is dominated by small, privately owned,
owner-operated firms. It is also quite diverse due to different levels of company maturity, scale and
market focus. A services-centred industry, it is characterized by the limited scalability of its
companies, which tend to have a regional or local focus in their operations.
Supply Chain Structure

The construction supply chain is among the most integrated of all supply chains. It is anchored in
owners, and, more specifically in their prime contractors, who control supply chain spending and cash
flow. The industry’s supply chains are extremely complicated, and this has led its companies to create
a highly developed culture of risk management. The sheer complexity of most construction projects
means that communication among the parties involved, plus the availability of skilled labour, are the
most important determinants of a project’s success. In addition to the inflation and volatility of
commodity prices, skills shortages remain the largest threats to the sector.
Trading Dynamics
The sector’s overall propensity to export is relatively low. There are numerous reasons for this,
including legislative barriers, lack of management sophistication, risk aversion, difficulties in
achieving competitive advantages in commodity markets, and the costs, challenges and risks of
operating abroad. However, some firms do export successfully because they maintain a strategic focus
on this business model. Some of the successful export segments are engineering and architectural
services, contractor services and construction materials. While the United States is usually the key
foreign market for these exporters, many of them also succeed globally.
The sector depends to a considerable degree on imports because of the limited domestic availability of
certain building materials and inputs. While the United States is the major source of these imports, the
sector is notable because it also obtains them from around the globe. Although Low Cost Country
i
Sourcing (LCCS) is common, few companies appear to possess the skills and processes for handling
the increased risks of global supply chain management and procurement.
Supply Chain Operations

In general, the construction industry exhibits a less sophisticated approach to supply chain
management than other sectors, although the level of sophistication varies greatly from firm to firm.
The limited adoption of advanced tools for supply chain management, and of technologies to help
enterprises collaborate in construction processes, means that the sector’s supply chains can achieve the
desired performance and speed only though constant human intervention. This creates substantial risks
and costs. That said, many firms are investing heavily in information technology to manage their
internal activities, and this represents a key sector strength.
The most notable supply chain management practice is that of delegating the control of 60 to 90 per
cent of total project spending to trade contractors. Many respondents reported deep concerns about the
risks caused by underinvestment in the processes, tool and skills needed by project managers to handle
their spending and procurement activities.
Another key feature of the sector is the demand for just-in-time delivery of materials and labour to job
sites. This not only requires a high level of coordination, but also places a considerable burden on the
distribution and wholesale segment of the supply chain, since it is pressured to serve as the industry’s
warehouse. Progressive distributors, however, are finding new ways to address this problem and to
provide value-added services at the same time.
Financial Supply Chain

For most firms, cash flow management is the most critical element of the financial supply chain.
Timely collection is a major concern, and payment is often a highly contentious issue. Practices such
as holdbacks, pay-when-paid and withholding payment as a tool to extract performance can create
serious working capital problems for contractors, especially when the contractor has limited access to
working capital financing. At the time of the interviews, however, most respondents claimed to have
strong liquidity.
Despite the vital importance of cash flow management, most respondents indicated that they focus
predominantly on reductions in procured costs and make every attempt to take early-payment
discounts.
ii
Gaps and Opportunities

There are service gaps at all levels of the supply chain. Opportunities lie in the two distinct areas,
strategic capacity/capability building and tactical, supply chain-focused, transaction support.
Structural capacity/capability building opportunities exist in the facilitation of foreign trade and
supporting the development of supply chain management as a strategic competency. Within this
context, potential opportunities for the CCA to include:
 Export facilitation through Canadian consortium building services (assembling Canadian

supply chain participants as possible as “solution package” to foreign owners);
 Facilitation of supply chain integration by hosting a Canadian technology platform for buyer
and seller collaboration in supply chain processes (including invoicing and payment);
 Supply chain management education developed specifically for the construction industry;
 Developing a technology solution directory to assist and encourage adoption.
Most of the operational gaps imply niche-oriented opportunities and solutions to help organizations
mitigate risk, improve cash flow and reduce barriers to trade. Areas of consideration include:
 Development materials to educate sector participants on the potential applications of Stand-by

Letters of Credit in supply chain risk mitigation and to free up working capital;
 Support offshore procurement activities through partnerships with sourcing/procurement
organizations and providing best practice resources;
 Introduce and support the development of Supply Chain Finance in the sector as a tool for
cash flow acceleration and work capital management, especially for distributors and
manufacturers;
 Work with lenders to support programs that finance investments in achieving compliance with
foreign market regulations and for finance foreign distribution arrangements for Canadian
manufacturers and distributors;
 Develop relationships with supply chain risk management service providers to assist sector
participants access services that protect against supply chain disruption risk and costs.
iii
INTRODUCTION
During the fall of 2008, EDC’s GTM Centre of Innovation, its Infrastructure Sector Team, the
Canadian Construction Association (CCA) and regional construction associations 1 collaborated on an
interview-based, qualitative research project into the Canadian construction supply chain. The study’s
objective was to enhance sector-specific knowledge by:
 understanding the business dynamics of both the upstream and downstream supply chains,
such as who sells to whom, how they interact with each other and which participants possess
significant control of supply chain performance;
 documenting business issues and priorities relative to supply chain management (SCM); and
 identifying supply chain (SC) challenges, and product and service opportunities in supply
chain operations.
Timing of Interviews
Most interviews were conducted between August and November 2008, prior to and during the
early stages of the economic downturn. As a result, numerous conditions have changed
dramatically since the interviews. The CAD/USD exchange rate and commodity prices have
fallen markedly and this would likely affect some of the responses. For example, the exchange
rate at the end of September 2008 was $0.94 and the price of a barrel of oil was US$105. In
early January 2009, these had fallen to $0.82 and US$38, respectively.
While the shorter-term economic conditions obviously affect these indicators and their impact
on the respondents, many of the findings in this document relate to operational elements that
remain constant regardless of economic conditions.
The remainder of this document, which consists of seven sections, summarizes the findings of this
research:
1. General Observations, providing general, recurring themes that are not necessarily supply-
chain specific, but which affect the underlying conditions and behaviours;
2. Supply Chain Structure, mapping the overall supply chain relationships and the buyer-supplier
power structure, and describing the predominant management model;
3. Trading Dynamics, outlining the sector’s export, import and foreign direct investment
tendencies;
4. Supply Chain Dynamics, examining operational practices in supply chain management;
5. Financial Supply Chain, presenting key financial issues in the functioning of the supply chain;
6. Gaps Analysis, summarizing areas in which respondents describe challenges; and
7. Opportunity Recommendations, describing areas where the CCA can act to close the gaps.
The analysis is based on interviews with a broad range of supply chain participants, and the responses
varied widely from company to company. In consequence, the report is a composite picture of the
1
The Grand Valley Construction Association and the Manitoba Heavy Construction Association.
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sector and is not meant to provide statistically significant results, but rather to indicate the sector’s key
trends, practices, issues and challenges.
This report addresses a number of interests, including:
 helping the EDC Infrastructure Sector Team augment its sector strategy by developing a new
engagement approach and new ideas for solving problems;
 providing EDC business development staff with market intelligence that will increase its
knowledge of the sector and help it engage prospects and customers more effectively;
 helping the CCA and other associations shape strategic initiatives and investment plans that
will enhance the sector’s capabilities and deliver value to its members; and
 helping firms in the sector gauge their overall position relative to the industry, and spur them
to consider investments related to their supply chains.
Respondent Profile
Respondents from all the sub-sectors of the industrial, commercial and institutional (ICI) and heavy
construction segments of the industry, as well as those from the infrastructure segment, participated in
the study. This included general contractors, trade and industrial contractors, road builders, heavy
construction contractors, manufacturers, suppliers and service providers. In all, 51 interviews were
conducted with CEOs, CFOs and procurement and supply chain executives. An additional 14
discussions were held with other organizations to examine specific questions and findings. Firm sizes
varied considerably, with annual revenues ranging from several million to several billion dollars.
Figure 1 outlines the diversity of the respondents.
Figure 1 - Respondent Profile (n=65)
Risk Management Architecture /

Services Engineering Equipment Rental General
6% 6% 5% Contractors
21%
Business
Services (Legal /
Tech.)
11% Trade / Industrial
Manufacturer / Contractor
Commodity 15%
Heavy Distributor /
Supplier Wholesaler
Construction /
12% 12%
Road builder
12%
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1. GENERAL OBSERVATIONS
Key Observations
The construction sector is highly fragmented and is dominated by small, privately-owned, owner-
operated firms. It remains quite diverse due to different levels of company maturity, scale and market
focus. Although it is often maligned even by its members, it is an evolving industry and one that,
according to several respondents, has made giant strides in its professionalism during the past 10
years.
Snapshot – The critical role of associations in the construction sector

The construction sector’s firms show a considerable propensity to participate in sector
associations, resulting in a high degree of integration at the policy, industry and relationship
development levels. Moreover, given the national integrator role of the CCA, regional and
segment associations also show a very high level of collaboration and appear to have strong
governance and management continuity. This provides an excellent platform for long-term
planning, continuity in advocacy activities and the creation of high-value, industry-wide
services
The creation of plan rooms to support bidding on public tenders represents an excellent
example of the way associations can deliver a value-added service that goes beyond
advocacy for their members.
In this context, some general observations can be made about the sector, as set out below.
Sophisticated risk management — Few sectors reflect greater complexity than the construction
industry, whose companies face the most diverse set of risks and challenges of any supply chain.
These include regulation; the number of parties involved in a project; engineering challenges;
complex, uncertain and often untimely information flows; challenges of supplier performance; tight
timelines; financing and payment risks; nature itself (weather) and scarcity of inputs.
Many respondents referred to business management philosophies that were highly risk-averse. As a
result, the industry has become extremely well attuned to risk levels and has developed not only a
strong culture of internal risk management, but has also spawned a sub-chain that mitigates risk by
supplying legal, bonding and insurance services. The study indicates that most companies focus on
project risks (such as penalties, supplier performance and cost overruns) and are not much concerned
with mitigating supply chain risks.
Most supply chain participants, from owners to manufacturers, indicated their intention of sharing
project risks. However, reality appears to be somewhat different. There is a well-entrenched practice
of pushing risk down the supply chain, often without equitable compensation for accepting it. Owners
try to use contracts to transfer as much risk as possible to prime contractors, who in turn distribute this
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risk onto subcontractors and suppliers. Trade contractors do the same to manufacturers. As a result,
smaller suppliers and contractors often bear a significant share (perhaps more than proportionate) of
the overall risk. Unfortunately, pushing risk onto these generally less-sophisticated firms incurs higher
overall costs and a greater risk of failure in project execution. Nowhere is this clearer than in the pay-
when-paid practice, which can create cash flow problems and payment delays at each level of the
supply chain, and continues to be a major source of friction within the industry.
Service market / domestic orientation — Construction is a services intensive sector, except at the
product manufacturing segment of the supply chain. Most firms concentrate on servicing regional and
even local domestic markets, partly at least because of the numerous structural barriers to exporting.
One of these barriers is fragmented legislation, especially the many building codes and certifications
that govern construction in potential export markets, and affect not only a company’s ability to work
in a foreign jurisdiction but also the types of risk — such as payment and bonding — that it must
accept in order to operate there.
Another factor affecting the propensity to export lies in the established sales model for the industry.
Most contractors win projects by responding to requests for quotations; this is a “pull” approach based
on established relationships, as opposed to a “push” approach based on active business development.
Barring the largest organizations, companies that use an active business development strategy usually
see it as a secondary one and restrict it to local operations, rather than placing its focus on export
market development. It should be noted that companies that are successful abroad tend to dedicate
specific resources to business development.
The inclination to export increases in the goods-oriented part of the supply chain. However, the
commoditized nature of many of the products involved tends to work against this inclination, since
they are often heavy and of low value for their weight. This makes transportation costs a key
determinant of the ability to export.
Snapshot – Importing workers into the Middle East market

The services focus of many firms creates a challenge for in succession planning.
Much of a firm’s value resides in its intangible assets, such as good customer
relationships and superior internal processes for project delivery, customer
satisfaction and cost control. These, however, are difficult to quantify in a succession
situation, when the firm is passing to new owners after the departure of the former
owners and key employees. Given the low market entry barriers and the absence of
tangible assets, many mid-market owners see this focus on intangible services and
processes as a substantial barrier to effective succession.
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Decentralization — As a result of the challenges noted above, companies usually replicate themselves
in new target markets by building parallel operations in them. Firms using this growth model tend to
operate in a relatively decentralized fashion, and to shift decision making to the heads of their regional
offices. While this creates a profit-centre mentality for each location, local control often precludes
synergies across the organization because of perceived regional differences and the individual
management styles of the local decision makers. Farther down in the organization, this tendency
repeats itself as management responsibilities are delegated to project managers, who are given
substantial authority and autonomy in making operational decisions and, in essence, find themselves
running their own businesses within each project. As a result, the industry tends to gravitate toward a
suboptimal integration of business processes, with higher operating costs and substantial opportunity
costs.
Asset-based versus non-asset-based firms — This is a fundamental difference between general

and heavy contractors. General contractors often do not perform the labour themselves and therefore
can operate in an asset-light environment, in which they delegate the work to third parties. As a result,
many of these companies exhibit limited leverage in their financial structures, and financial
institutions appear reluctant to extend operating credit to them.
At the other end of the spectrum, heavy construction firms do most of their own work (self-
performance) and often develop considerable vertical integration to support their asset-heavy
activities. Due to their large investments in both fixed and fleet assets, these companies tend to have
major financial leverage in the form of equipment loans and leases.
These differences affect the business models used by the two types of company, with general
contractors tending toward decentralized procurement and heavy construction companies using a
centralized and corporate-wide procurement approach. Additionally, heavy construction companies are
more inclined to explore strategic relationships with vendors in order to reduce operating costs as
much as possible.
Relationship businesses — Most respondents said that building relationships is critical to driving
sales. This is especially true for general and trade contractors and is caused by their limited ability to
differentiate their firms according to the core services they offer.
At the same time, however, there appears to be considerable distrust among these players. While many
general contractors believe that they are prompt and responsible about payment, many trade
contractors do not share this perception. As a result, the latter are not particularly quick to pay their
suppliers, which forces distributors and manufacturers to wait for unreasonable lengths of time (in
-5-
their opinion) before they are paid. Using delayed payment to extract performance is a typical
behaviour. This kind of behaviour elicited interview comments such as, “construction is legalized
extortion.”
Resistance to change — The study suggests that because of intransigence at the leadership level, the
Canadian construction sector is not as progressive as it could be. This is consistent with the aversion to
risk noted above, but results in few companies being willing to embrace even proven solutions if these
differ from existing practices and methods. Many respondents acknowledged this as a key barrier to
innovation. The exceptions appear to be the larger firms and manufacturers that have the capital to
invest in new processes and technologies. For these companies, the ability to differentiate themselves
through research and development (R&D) is an acknowledged competitive strategy. However, the
general unwillingness to embrace change as a tool for competitive differentiation and increased
profitability hampers the industry as a whole.
Communication issues — Many respondents identified communication as one of the supply chain’s
greatest challenges. There are major dependencies among and within the various supply chain
segments that govern project delivery, so effective communication among owners, service providers,
prime contractors and trade contractors is the critical enabler for the on-time, successful completion of
a project.
Strong focus on investment in people — Each respondent was asked where he or she would most
likely commit scarce resources when reinvesting in the business. Almost universally, the response was
that he or she would invest in people, largely through skills development. Those who did not respond
in this way were usually manufacturers seeking to augment productivity through automation and
innovation, or distributors seeking to use automation to improve their cost structures.
There are two reasons for this response: first, there is a scarcity of qualified professionals and
tradespeople; and second, construction is a service industry in which companies must depend on their
staff to make intelligent decisions. Interestingly, only a few companies saw investment in business
processes and management tools as a way to help these people become more effective. This may
simply be a symptom of the industry’s huge demand for skilled people, but it should be an underlying
concern with respect to retaining workers and maximizing their potential.
Skills and supply shortage — Many of the respondents were concerned about their competitiveness
because the shortage of skilled workers in the trades was undercutting their ability to deliver projects
on time and within cost envelopes. There was a similar worry about the scarcity of professionals with
adequate experience in project management and procurement. The proprietary methods used by many
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of the firms also result in steep learning curves for new employees, leading in turn to high training
costs and lower initial productivity.
Companies operating in foreign markets have two skills issues. First, few employees are willing to
leave Canada for the long periods required; second, many lack the knowledge, experience and
language skills needed for success in the local market. These factors are a major barrier to exporting
Canadian construction expertise to emerging markets.
Commodities issues are creating critical supply chain concerns — Price volatility is the most
critical challenge to procurement organizations, and affects a company’s ability to price effectively
and remain competitive in bidding situations. While Canadian road builders have been successful in
implementing escalation clauses relative to the cost of asphalt, this is one of the few commodities for
which buyers and sellers have negotiated agreements covering price volatility. This situation has
created problems at various times during the last few years, with suppliers refusing to hold prices on
quotes for more than one business day, or even less. This has forced procurement managers into risky
behaviours to ensure supplies of scarce commodities and has wrought havoc in estimating tender
prices, especially given the time frames over which these prices are expected to be valid (30, 60 and
even 120 days in some cases). 2 This situation has caused innovative companies to leverage their
balance sheets and cash positions to secure supplies of essential materials when prices fall, since the
cost of warehousing and insuring them — for periods of up to two years, in some cases — is more
than offset by the ability to meet client demand at a predictable price.
Complete focus on cost — Due to the commodity nature of the business, most companies, especially
contractors and general contractors, exhibit a relentless focus on reducing cost, largely through the
competitive bidding process. However, this mentality is also evident at the owner level, where
engineering and architecture budgets continue to diminish. This has a particularly detrimental effect on
cost management, since incomplete drawings are frequently released for both bidding and
construction, resulting in expensive errors.
Scale and sophistication drive innovation — The largest general contractors are very clearly the
most progressive with respect to supply chain management and business process development. From
the perspective of process development, technology investment and process integration, however, they
continue to lag behind other sectors, particularly manufacturing.
2
The CCA is currently working to address this issue.
-7-
One indicator of openness to innovation lies in management’s approach to running the business. Firms
run by “lifestyle” owners — that is, owners who see the company primarily as a means to support their
lifestyles — appear to have less propensity to innovate or reinvest profits for company growth, and
instead focus mostly on generating income. These firms appear to dominate the marketplace and have
limited value in succession situations because so much of their worth is bound up in the goodwill that
resides with their owners. At the other end of the spectrum, large, publicly traded firms have the most
integrated and aggressive approaches to innovations that will drive shareholder value. Similar
tendencies exist in professionally managed organizations and family businesses that are designed for
succession. For financial institutions, this subset of construction companies probably represents the
true marketplace for new services.
-8-
Construction Sector SWOT Analysis

Table 1 is a composite picture of the industry based on the most common responses and perspectives
obtained during the interviews.
Table 1. Sector SWOT Analysis

Strengths Weaknesses
 Strong financial position of many companies  Limited supply of qualified labour
 Risk management culture  Managerial and cultural resistance to change,
 Strong internal IT investment especially at the contractor level, results in the
 Experienced management in the innovative slow adoption of innovative practices and
firms products
 Strong Canadian community for collaboration  Underdeveloped supply chain management
around structural issues; associations play a practices
key role in creating a common voice  Weak inter-enterprise integration precludes
 World-leading, quality engineering and tightly integrated operations
architectural service providers  Fragmentation of the marketplace results in
 Niche expertise in certain construction types highly regionalized firms of limited scale
and in remote location operations  Low export propensity and capacity of many
mid-market firms, although this is often a
conscious choice due to the perceived risks
 Import dependencies in certain raw and value-
added materials
 Some sub-segments have difficulty accessing
capital
Opportunities Threats
 Long-term need for infrastructure investment,  Deterioration of demand conditions
both in Canada and globally  Commodity price volatility and transportation
 Significant opportunities for export growth in costs
emerging and developed markets  Access to operating and project credit is
 Investment in supply chain processes offer increasingly limited
significant savings opportunities  Domestic and regional focus of firms results in
 Innovative product manufacturers can compete under-appreciation of the potential threats from
in any global market through innovation and global competition
value-added services and products  Customer non-payment risk jeopardizes the
 New business models offer ways to provide solvency of undercapitalized mid-market firms
higher levels of service and supply chain  Negative perceptions of the industry by
performance customers
 Labour mobility barriers erected by foreign
governments
 Fragmentation of markets, from a jurisdictional
perspective, erects barriers to successful
exporting
-9-
2. SUPPLY CHAIN STRUCTURE
Supply Chain Map
From its raw materials to its finished projects, the construction supply chain is one of the most
integrated and interdependent of all supply chains. It also embodies a large and diverse group of
participants, most of which are directly connected to the end product, as opposed to being secondary
or support players. Owners and their prime contractors anchor the overall supply chain, but there are
two discernible sub-chains within it. These are building construction and infrastructure construction,
the latter also being known as heavy construction. Appendix 1 provides a schematic representation of
the sector’s supply chain relationships.
Some of the sector’s characteristics, many of which are different from those of other industries, are
evident from the supply chain.
 Professional services — Architects and engineers are vital elements of the supply chain
because of their advisory roles and their compliance functions. They also play a key part in
transmitting information among owners, general contractors and trade contractors. On
infrastructure and similar projects, they may play a major role in procurement either as the
Engineer, Procure, Construction (EPC) contractor or as consulting engineers, for example by
specifying or directing procurement for major components such as HVAC systems, turbines
and generators.
 Financial services providers are key enablers.
o Project finance providers furnish credit to owners so they can undertake projects,
and these providers may control the overall execution of a project. Toward the end of
the study, it became very clear that the rapid shrinkage of available credit was creating
a growing threat to success in the industry.
o Equipment finance providers — These institutions provide financing to asset-based
heavy construction firms, which typically use credit for most of their equipment
purchases.
 Risk mitigation providers — Surety, bonding and insurance providers are essential to
effective contracting processes and to ensuring the performance of trade contractors. Some
general contractors will not work with un-bonded contractors, and some owners also require
bonding even for major trade contractors. However, some owners seem increasingly willing to
relax this requirement to reduce costs.
 Legal services providers — The inherent complexity of the industry means that legal
services firms are essential for resolving the contractual disputes that inevitably arise. They
also play a key role in the financing process.
Another differentiating characteristic of the industry lies in the way its buyers manage their suppliers.
Buyers employ one set of practices and approaches when dealing with trade contractors and
professional services providers, and a substantially different set when dealing with goods providers.
- 10 -
Buyers demand a much greater level of flexibility from services providers and actively manage these
relationships to their benefit, since a much higher level of cooperation is required in these interactions.
Relationships with good suppliers are much more transactional and have limited flexibility on
contractual and payment issues.
Appendix 2 provides an overview of the main characteristics of the different supply chain participants.
Concentration of Power
General contractors and heavy contractors typically control project budgets and the associated cash
flows, so they are the most important buying hubs in the overall supply chain. However, in the
building construction sub-segment, trade contractors are usually responsible for the actual
procurement of goods and services, with general contractors frequently delegating 60 to 90 per cent of
total project spending to trade contractors.
Figure 2 depicts the power structure of the major buyer-supplier categories. These relationships are
classified according to the degree of relative power between buyer and seller, as follows:
 buyers’ or sellers’ markets, which are controlled by the dominant organization;

 power buyer / power seller markets, in which some degree of buyer/seller cooperation occurs,
even when one party has some degree of pre-eminence because of factors such as scale or
limited supply;
 hybrid markets, where the relationships have evolved to include a high degree of collaboration;
and
 market transactions, where goods and services are simply exchanged with no significant power
imbalance in either direction.
The elements of control, cooperation and collaboration are key factors in the development of
integration among firms. They influence procurement and supply chain activities at a variety of levels,
from the simple purchase and delivery of goods to the creation of new value-added services and the
tight integration of companies into the supply chain itself.
While regional demand plays a role in the relative power of buyers and sellers at any given time, the
following is generally true (again in reference to Figure 2):
- 11 -
Figure 2 - Construction Supply Chain Relative

Power Structure
Power Seller
Hy
br
id
t
Few Marke
any
to m
Spe
ers
cia
Con lty Trad
Sell
trac C2 e
Commodities / Raw
tors C3
C1
Materials
Power Buyer
C2
/
rer
factu tor C1
nu ib u
GC / Heavy
Ma istr
D Construction
Contractors
M
ar
ke
M tT
an ra
y
to nsa
m c
an tion
y ew
s to F t C1 = control
ny rke
Ma Ma
yers C2 = cooperation
Bu
C3 = collaboration
 General and heavy contractors (dark blue) represent the key buying hubs and tend to control
the overall supply chain’s operation.
 Certain commodity suppliers of raw and intermediate commodities (light blue grey) can also
dictate relationships due to demand conditions.
 Niche or specialized trade contractors (light grey) possess significant power from the seller’s
perspective and therefore maintain some pricing and delivery power.
 Manufacturer and distributor relationships appear quite transactional and have limited strategic
dependency, as indicated by the predominance of market-based transactions (taupe).
Supply Chain Management Practices

Only a very small number of large contractors employ centralized, corporate procurement. Where this
is done, it is typically for procuring nationally or regionally negotiated contracts for bulk commodities
such as fuel, cement or concrete, or for indirect spending and capital goods.
- 12 -
A much more typical approach to supply chain management, and the one that is used by most
Canadian prime contractors, is shown in figure 3. 3 In this model, projects are allocated to project
managers or project teams who are responsible for most aspects of project execution. This includes the
sourcing, procurement and spending management associated with the project; each project, therefore,
operates its own individual supply chain.
The result is a fragmented approach to supply chain management that under-employs best practices
and standard processes. This limits the buyer’s ability to achieve cost economies through pooled or
bulk buying. Furthermore, this model reduces supply chain resiliency because it creates a potential
single point of failure at the project manager level. This means that the success of a project, especially
for small and medium-sized contractors, often depends on the heroic efforts of a small number of
people.
3
Adapted from Kalyan Vaidyanathan and Gregory Howell, “Construction Supply Chain Maturity Model – Conceptual
Framework,” Proceedings of the International Group for Lean Construction-15 July 2007.
- 13 -
Figure 3 - Construction Supply Chain Management Practices

Logistics
Architect /
Supply Chain #1
Engineers Proj. #1
Distributor /
Trade Contractor #1
Wholesaler #1
Bldg. Products Mfg #1
Distributor / Customer #1
Bldg. Products Mfg #2 Trade Contractor #2 PM #1
Wholesaler #2
Bldg. Products Mfg n Distributor / Project Financier

Wholesaler n Trade Contractor n
CONTRACTOR
GENERAL
Logistics
Supply Chain #2
Architect /
Engineers Proj. #2
Distributor /
Trade Contractor #1
Wholesaler #1
Distributor / PM #2 Customer #2
Bldg. Products Mfg #2 Trade Contractor #2
Wholesaler #2
Bldg. Products Mfg n Distributor / Project Financier

Wholesaler n Trade Contractor n
Logistics
Supply Chain n
Architect /
Engineers Proj. n
Distributor /
Trade Contractor #1
Wholesaler #1
Distributor / PM n Customer n
Bldg. Products Mfg #2 Trade Contractor #2
Wholesaler #2
Bldg. Products Mfg n Distributor /

Trade Contractor n Project Financier
Wholesaler n
Financial Institutions
Note: The General Contractor (GC) plays a key anchor role in the functioning of the supply
chain. Moreover, this diagram illustrates the critical importance of the Project Manager (PM) in
driving the overall supply chain performance. With the authority to control schedule, budget,
procurement and supply chain management, the PM represents the key determinant in project
success, owing to the cascading effect of decisions at the GC level to remainder of the supply
chain participants.
Note: while this model exists for GCs, it is also similar for Trade Contractors as they employ a
similar project and supply chain management model.
There are varying levels of sophistication throughout the industry, and company approaches to SCM
can be classified according to the supply chain maturity model in Table 2. 4
4
Adapted from Kalyan Vaidyanathan and Gregory Howell, “Construction Supply Chain Maturity Model – Conceptual
Framework,” Proceedings of the International Group for Lean Construction-15 July 2007.
- 14 -
Table 2. Canadian Construction Supply Chain Maturity Taxonomy
Maturity Level Key Characteristics Typical Canadian Company

Ad hoc  Limited internal processes  Most SME GCs and trade
 Independently managed projects contractors
 Ad hoc internal collaboration
 Limited planning
 Limited automation
 Inconsistent customer satisfaction
Defined  Cross-project information sharing, but  Progressive SMEs, GCs and

project remains independently managed trade contractors
 Some process structure and  Most regional GCs
collaboration  National trade contractors
 Performance management in place  Most heavy construction
 Some IT integration contractors
 SCM is tactical function
Managed  SCM seen as part of corporate strategy  Large/leading GC and heavy

 Tools and processes exist for multi- contractors
project, cross-firm, cross-functional  Multinational manufacturers
collaboration and distributors
 Very strong intra-corporate IT
integration
 Strong supply visibility
 Excellent communication between
buyers and suppliers
Controlled  SCM function is controlled, predictable  Few if any

and managed
 Process-oriented SCM functions as
opposed to traditional siloed functions
 Supply chain becomes a network of
collaborators as opposed to competitors
 Inter-enterprise IT integration
 High degree of trust and dependency
- 15 -
3. TRADING DYNAMICS
Exports
The sector exhibits a relatively low overall propensity to export. This stems from a variety of reasons,
including legislative barriers, lack of management sophistication, aversion to risk, the difficulty of
achieving competitive advantage in commodity markets, and the challenges associated with managing
projects abroad.
Snapshot – Infrastructure projects and foreign investors

Heavy construction companies and large GCs noted a fear of bidding on foreign-financed
domestic infrastructure projects. These could technically be considered an export, since the
assets, while located in Canada, are likely beneficially owned and paid for by a foreign
concessionaire, often an infrastructure fund or consortium. However, the funding mechanism
frequently involves a shell entity designed to own the Canadian component, which limits
recourse to the concessionaire and brings into question the certainty of payments. This
represents a significant opportunity for credit enhancement and insurance relative to the
owner’s obligations to suppliers.
Nevertheless, many Canadian firms successfully export to countries all over the world. Some operate
opportunistically, reacting to tenders and requests for quotes, but most exporters in the Canadian
construction sector — whether service-oriented or product-oriented — view their initiatives as very
strategic ones, primarily because of the high costs of exploiting and servicing foreign markets.
The three most common export models are:
 Engineering and architectural services exports — Canadian professional services

companies are renowned globally for their expertise, professionalism and quality of work, and
many such firms have chosen to deliver their services into foreign markets by leveraging their
intellectual property and business capabilities.
Many of these companies provide consulting, EPC and architectural services, where their
creativity, relationships and technical expertise allow them to differentiate themselves from
their competitors. However, they often find it challenging to acquire the expatriate resources
needed to operate consistently in foreign markets. Too few Canadians appear willing to
relocate abroad, making this business model unsustainable on a wide scale.
 Contractor services exports — General and trade contractors operate effectively in foreign
markets by leveraging their proprietary processes and project management/supervisory skills,
and this asset-light business model lends itself to the export of knowledge. Most such firms act
as general contractors or construction managers; some, however, have carved out niches in
certain specialties, and this helps them win contracts when local resources cannot fill these
specialized needs.
Many firms that have successfully adopted this model have built close relationships with major
global contractors, which pull them into projects in different markets. Many feel that they are
- 16 -
not large enough to win such work on their own, and that the preferred approach is the
consortium model in which they cooperate with a prime contractor of global reach.
Usually these exporters do not use Canadian labour abroad, due to mobilization costs and
labour cost differentials in emerging markets. Instead, they employ domestic or imported
labour (such as Indian workers into the United Arab Emirates) to furnish services in foreign
countries, while providing management and supervisory labour from Canada. Like the
engineering and architectural services market, however, this business model suffers from the
limited availability of expatriate Canadian labour.
Many of the companies that employ this model have expressed an interest in adding value to
their contracts through materials supply and supply chain management. However, they
frequently lack the knowledge of the local supply chain and its contacts that is required to do
this, as well as the financial resources to engage in such an undertaking.
 Building materials exports — Companies focused on this market function as goods-based
segments of the supply chain and show the greatest propensity to export. The most successful
firms are those that provide high value-added and custom manufactured goods, since Canadian
manufacturing costs make many of our products uncompetitive in comparison to those being
exported from emerging markets. Furthermore, when transportation costs are high relative to
the value of the goods, Canadian exporters are most successful when they differentiate their
products on the basis of quality, innovation and an overall service offering (e.g. distributor
financing etc.), rather than on cost.
Snapshot – Importing workers into the Middle East market

Companies exporting to the Middle East usually import labour (typically from a country with
low-cost labour) into the target market to perform services. In order to meet legislative
requirements, the importer must deposit with the relevant government authorities a certain
amount per imported worker (typically US$2,000) to ensure that the worker can be returned to
his home country at no cost to the government. As it is customary for Canadian exporters to
bring hundreds of workers at time to the market, this represents a large amount of cash and a
significant erosion of working capital. Bonding or standby letters of credit may be more
effective ways of addressing this need and should be considered by the importing company.
Successful Canadian building materials exporters usually adopt one of two models: either they
have built strong distribution networks through foreign distributors of building supplies (by
creating a solid value proposition for that distributor that may include product, services and
financing through attractive payment terms), or they have successfully associated themselves
with Canadian companies doing business in foreign markets, and are brought into a consortium
due to the high value of their products.
Geographic proximity makes the United States a key export market, but many Canadian companies
indicated that the strengthening Canadian dollar has made them very conservative in their view of the
export opportunities in that market. The continued deterioration of the U.S. construction market has
eliminated any optimism related to it, and most exporters to the United States are currently trying to do
no more than defend their market share. Infrastructure investment in emerging markets makes these
regions an attractive alternative for Canadian exporters, however, and the Gulf Cooperation Council,
specifically the UAE, is frequently mentioned in this regard. Latin America and the Caribbean
- 17 -
represent additional areas of interest, and companies in Eastern and Atlantic Canada possess a long
track record of success in these markets.
Imports
The sector is import-intensive at all levels of the supply chain. Imports are crucial at a variety of
levels, from the raw materials used in the manufacture of cement and asphalt, to intermediate goods
such as marble and tile, to finished goods such as valves, building materials, plumbing and electrical
fixtures. Additionally, the limited availability or complete absence of domestic supplies in certain
regions means that these markets must import many products, including masonry materials, stone,
certain grades and profiles of steel, elevators and engineered systems such as HVAC systems. Most
respondents indicated that they imported a large portion of their capital goods from outside Canada.
Common purchases were cranes, manufacturing equipment and heavy construction equipment.
Unlike most other sectors, the construction sector imports labour. This occurs both in Canada and
throughout the rest of the world because of the global lack of skilled labour and its high utilization
rates. As noted later in this report, problems with labour mobility due to immigration and other
compliance issues remain a significant concern for many service providers in the sector.
The United States is the most frequently cited import market because of its geographical proximity,
which results in lower transportation costs, shorter and more reliable delivery times and predictable
quality and warranty service. But despite its preference for acquiring goods domestically or from
North American suppliers, the construction industry has one of Canada’s most diverse sets of import
sources. Among the frequently cited import sources are China (manufactured goods, fixtures and
tiles); Turkey (steel); Brazil (limestone and fly ash); Germany and Sweden (cranes, valves and capital
goods); Italy (tile, granite and marble); and Japan (heavy equipment).
Low Cost Country Sourcing (LCCS) is common. Most of it is driven by major manufacturers of
fixtures and building materials and by distributors that source directly from foreign countries or
through import houses. Most trade contractors prefer to deal with Canadian suppliers and therefore
import indirectly, using distributors. This can allow them to make a third party responsible for
complying with standards set by bodies such as the Canadian Standards Association (CSA). It also
allows them to avoid managing large inventories. Companies seem willing to trade off higher costs for
these services, despite the confirmed belief that low bids win.
Trade contractors are often required to import goods from overseas in order to fulfill specific elements
of their contracts; these goods are frequently owner-specified materials and components such as tile
- 18 -
and light fixtures. From a skills and process perspective, however, few trade contractors appear
adequately equipped to handle the higher risks of global supply chain management and procurement.
As a result, the delivery and performance issues associated with owner-specified contract requirements
are of considerable concern to these contractors. On the positive side (form a supply chain
management perspective), some larger general contractors are using their greater expertise and better
management processes to relieve the trade contractors of these procurement responsibilities and thus
mitigate their risk, offering increased labour margins to compensate for the lost product sales.
Discussions with wholesale distributors indicated that although their foreign sourcing is critical to
remaining competitive, Canada is not seen as a strategic market for many of their LCCS suppliers nor,
to a lesser extent, is North America. These suppliers appear more interested in capturing significant
shares in higher-growth markets in Asia, the Middle East and even Europe. Canadian firms, in
consequence, must pay constant attention to delivery terms, pricing and even warranty service when
dealing with LCCS suppliers, and dealing with them is generally less satisfactory than dealing with
suppliers in developed nations. Delivery delays represent the most common issue and, due to the cost
of construction delays and penalties for failing to meet milestones, the greatest risk.
Many of the respondents have indicated that while they do business in China, it is a result of habit and
overall market trends. Many are actively exploring India and other emerging markets because of
continuing problems with Chinese product quality, unreliable delivery and service, and the rising
prices of Chinese products.
Canadian direct investment abroad

For the construction sector, Canadian direct investment abroad (CDIA) is the preferred and the most
common approach to penetrating new foreign markets. In the case of the largest Canadian general
contractors, this translates into the acquisition of foreign firms, and most of these companies have used
foreign acquisitions to increase their international footprint and expand their ability to serve different
end-user markets.
The strategy of acquiring foreign businesses is less available to mid-market firms that lack the
financial strength of their larger cousins. These firms tend to grow internationally by replicating
themselves in the host country or region. The result is much lower growth rates, but the overall risks to
the firm are lower because the investment outlays come in stages rather than all at once.
- 19 -
The interviews revealed an overall propensity to use acquisition when expanding into lower-risk
markets such as the United States, while penetration of riskier markets appears to occur largely
through organic growth or small acquisitions.
4. SUPPLY CHAIN DYNAMICS
Upstream supply chain operations

When compared to other industries, the construction sector exhibits a generally less sophisticated
approach to SCM, especially in the case of services companies. Even within the sector’s supply chain
itself, services firms show large disparities of sophistication, depending on size and on customer and
operational focus. Many larger companies possess institutionalized processes and tools, while smaller
ones tend to operate in a more ad hoc fashion.
Companies in the manufacturing sector, by contrast, by employ well-developed SCM practices and
exhibit the highest levels of SCM sophistication. Some larger commodities players observed that their
suppliers of raw materials (such as limestone and fly ash for cement manufacturing) were not
particularly advanced in SCM management, and had just started to use long-term supply contracts and
demand-management techniques. Sophisticated SCM and procurement people, who have come to the
construction sector from other industries, such as automotive or aerospace, indicate that the
construction supply chain offers many opportunities for cost savings and process enhancements,
especially with respect to inter-enterprise collaboration.
The most notable supply chain feature lies in the willingness of general contractors to delegate the
management of 60 to 90 per cent of their total project spending to trade contractors, whose processes
and tools are often even less sophisticated than those of the general contractor. This increases the
overall risk profile of the supply chain, especially from a project delivery perspective. Not
surprisingly, respondents from both the general and trade contractor levels of the supply chain
described a strong need for manual expediting by project managers to ensure that materials would be
available when required. Given the major penalties that can apply if a project is delayed, some
contractors were willing to incur large transportation charges — often an order of magnitude greater
than budgeted — to make sure that materials reached the project site at the right time.
Another key trait of the industry lies in its almost exclusive focus on cost and on low bids, especially
at the trade contractor level. While many have a preferred supplier list, they nevertheless seem willing
to select the lowest bidder, in some cases regardless of the fact that this may introduce increased
performance risk. The study indicates that companies are willing to accept this suboptimal outcome to
- 20 -
win business. This characteristic is predominant in industrial, commercial and institutional markets,
but is less common in projects that require specialized services or use directed procurement.
The responsibility for procurement and supply chain management generally resides with the project
managers. Supply chains, consequently, are rarely managed at the enterprise level but rather on a
project-by-project basis. General contractors acknowledge that this results in an underleveraged
capacity to obtain volume discounts, but they contend that a regionalized, fragmented approach to
supply chain management is a sensible strategy. They give several reasons for this: first, that their
annual demand needs are difficult to estimate because it is hard to predict what contracts they will win;
second, that local project offices tend to have their own supplier base due to local and regional
relationships; and third, that procurement managed at the corporate level is potentially costly and
prone to delays.
While most firms embrace this model, some of the more progressive companies are moving toward
increased centralization of procurement and are creating corporation-wide processes for increased
management visibility and control. They are seeking to consolidate buying functions such as indirect
spending and capital investments, and to establish national contracts with preferred suppliers who can
offer greater discounts and specific service levels. Given the wide variability of commodity prices,
some players are negotiating long-term, national-level contracts (of 24 months, in some cases) with
preferred suppliers in order to make their costs and service levels more predictable. Most buying in the
sector, however, is still being done on a spot basis via purchase order.
Procurement outsourcing has not yet become a mainstream strategy, due to the conservative views of
many managers and their general resistance to new business models. This underleveraged situation
could provide some companies with major opportunities for driving down the costs of goods and
improving the economics and efficiency of their logistics. Companies like BuildDirect
(www.builddirect.com), for instance, offer ways to use collective spending in the overall industry to
obtain greater discounts and increase the reliability of the supply chain’s performance, without
creating a centralized procurement group.
As previously noted, the transfer of risk from buyer to seller is a key industry trait. This occurs not
only contractually, but also in the pressures exerted on suppliers and on the distribution segments of
the supply chain. Few contractors have invested in warehouse space to accommodate inventory
buffers; they expect the wholesale/distribution segment to provide this service and its associated
financing so that the contractors can benefit from just-in-time delivery of goods.
- 21 -
Wholesalers report that although they are willing to do this, many contractors are deficient in demand
planning and in providing lead times for orders, and this disrupts the supply chain. These deficiencies
can be traced back to the contractors’ ad hoc SCM processes, their weak buyer-supplier and inter-trade
communication, and the concentration of procurement responsibilities with a few individuals. As a
result, wholesalers in their turn pressure manufacturers to provide stopgaps by setting up emergency
stocks at different points in the supply chain. The ultimate consequence is an overall increase in the
cost of goods for the end user. Another trend noted by some trade contractors was a tendency for
manufacturers to shift responsibility for warranty claims to their distribution networks. This also
creates extra costs for all involved.
The distribution segment is an excellent example of innovation in supply chain management.

Progressive manufacturers and distribution/wholesale firms are engaging in more sophisticated
approaches to inventory management, such as vendor managed inventory (VMI) 5 systems that provide
maintenance-repair-operation (MRO) parts, consumables and spares in customer-owned facilities.
VMI also equips job sites with “inventory trailers” that are regularly restocked so that contractors (e.g.
electrical and plumbing) can be less concerned with goods availability and ordering. Other innovations
lie in guaranteed overnight delivery for orders placed the previous day, and the emergence of
value-added services such as the assembly of kits according to preset bills of materials.
Many small and mid-sized contractors express a preference for doing business with local or regional
suppliers and distributors, and emphasize the importance of relationships and of being close to their
sources of supply. Most of these relationships appear to be transactional rather than strategic, although
they are often of long standing. At the other end of the spectrum, larger national contractors expressed
a preference for dealing with national and multinational distributors, and many are moving toward
national agreements to take advantage of volume discounts and standardized service levels.
The construction supply chain leads other sectors in two major areas of upstream supply chain
management:
 Tendering — Given that its projects are so complex, the industry has developed advanced
tendering management processes and tools that include creating specifications, compiling
estimates, evaluating bids and setting up plan rooms managed by industry associations.
5
In VMI, the supplier assumes responsibility for stocking and maintaining the buying organization’s inventory, and keeps the
supplied goods to agreed service levels. The vendor then issues a monthly consolidated invoice for all items used.
- 22 -
Complaints about tendering often stem from the incompleteness of drawings and
specifications, which can cause disputes about the scope of work once a contract has been
awarded and work is underway.
 Contract language — The standardization and simplification of contract language seems to be
a goal of most general contractors. The use of Canadian Construction Documents Committee
(CCDC) forms, often with modifications, is common for contracts between owners and general
contractors, and between general contractors and trade contractors. Since these contracts are
the most prone to dispute, the use of CCDC forms does represent some progress. Such
standardization, however, is not common in standard purchase orders for goods, nor in indirect
spending.
At an operational level, the integration of trade contractors and suppliers is generally limited to using
internal management systems that automatically generate purchase orders to be faxed, mailed or
emailed to suppliers. All contracts with trade contractors are signed in hard copy because of
compliance requirements. Because of these practices, the supply chain offers many opportunities for
process development and integration that will reduce the transaction overhead associated with paper-
based processes. This particular paper burden is relatively low, however, when compared to the
paperwork needed to manage tenders and project documentation.
A major challenge for most organizations, especially at the contractor level, lies in the documentation
requirements. While there is no way to avoid this, given legislated and buyer compliance
requirements, it adds yet another layer of cost to the supply chain.
Downstream supply chain characteristics

For the purposes of this report, the downstream supply chain refers to owner activities. Five major
characteristics of these activities emerged from the interviews:
 Unrealistic expectations — Numerous contractors and engineers said that many of their
customers do not understand the sheer complexity of their projects and the impact that their
decisions have on project schedules. While collaboration tools and better project management
practices have improved information sharing, this has provided only a partial solution. As a
result, many general contractors reported that clients simply assume that once the tender is
awarded, the building will go up quickly and on schedule. It appears that such clients expect
instant gratification, at least to some degree, once the tender phase has ended. Protracted
tender negotiations that eat into project timelines often aggravate the situation, as owners try to
hold contractors to original completion dates in spite of the delays caused by the owners
themselves.
 Increased willingness to pay for quality — Several respondents reported that some of their
more exacting customers are willing to pay for quality and demand superior service and
performance. Conversely, others noted that many owners are adopting potentially dangerous
practices to deal with escalating construction costs. Underinsuring and using un-bonded trade
contractors are examples of this, and represent increased risks.
- 23 -
 Selectivity — Partly because of overall market demand for services, most respondents
indicated that they were selective about the clients with whom they would deal. Many specialty
trades, such as roofing, preferred to deal with owner-operators because payment was more
predictable and it was easier to resolve disputes. Land developers were almost universally
regarded as among the most difficult customers with the highest risk, and many contractors
would deal with them only if the developers provided a bank guarantee for the contract value.
 Penalties — From a payment perspective, the threat of liquidated damages and similar
penalties places the entire supply chain at risk, and this threat shapes many supply chain
decisions. As a result, general contractors place considerable pressure on both trade contractors
and suppliers to help them make up any time lost in their schedules.
 Warranties — Owners, especially in the heavy construction markets, have increased their
warranty requirements over the past few years, forcing contractors to accept a variety of
additional risks. This appears predominantly in the road-building segment and is a result of the
changing tender requirements of public sector buyers. Suppliers’ responses to this change are
varied, although few saw a need for long-term performance bonds. This is likely due to the fact
that they are somewhat captive to their clients, and the threat of being removed from tender
lists forces them to accept the extra risks.
Key success factors

Respondents were asked about the key factors in winning business. Relationships and price were
crucial, but they identified other influences as well.
 Contractors — The vast majority said that quality work and strategic focus on customer
satisfaction were essential to consistent success.
 Manufacturers and suppliers — This segment of the supply chain placed a premium on
innovation and engineering.
 Wholesale and distribution — Delivery turnaround and pricing drive the purchase decisions
in this segment. Some trade contractors also identified innovation as a secondary differentiator
for adding value.
Given that financing and risk management represent integral parts of the supply chain, one might
assume that some firms would see these tools as the means to provide added value for their customers.
In general, though, they were considered as a necessary cost of doing business. As a result, there may
be substantial opportunities for repositioning such services as value creation tools. VMI and new
approaches to supplier payment would be two possibilities.
Adoption of information technology

Adoption of intra-enterprise information technology is a key strength of the industry. General and
heavy contractors have made concerted investments in the following tools:
 enterprise resource planning (ERP) and accounting packages to handle billing and project cost
management;
- 24 -
 project management tools to provide better visibility of project timelines, progress and
encumbered costs;
 document management to handle project documentation, revision and compliance, and to help
eliminate the cost of paper storage resulting from retention requirements; and
 collaboration technologies to share project information, to improve communication and to
centralize all project information to prevent versioning problems. Many associations, for
example, have moved plan rooms online to provide value-added collaboration and bid support
services for their members. However, respondents at all levels of the supply chain referred to
the rapidly proliferating numbers and types of these tools, which make it difficult to
standardize on a single collaboration platform.
Firms with distributed operations exhibit inconsistent adoption of these tools. The ones that are
mandated by head offices seem well entrenched, but systems that would be highly valuable — such as
tender management — are often not adopted by local offices due to managerial decisions at those
locations. It thus appears that some larger firms may be missing opportunities to exploit technology
tools more effectively across their entire organization.
In contrast to the relatively well-developed technology infrastructures within companies, inter-

enterprise technology integration is limited. Many general contactors resist investing in such
integration, claiming that the fragmented levels of technology adoption by trade contractors make it
difficult to implement and that it does not produce a sufficient return on investment. Some also claim
that many small contractors do not even have computer systems to integrate. This may be true in some
instances, but it appears to be the exception, not the rule.
In any case, the creation of an integrated and efficient trading network is a significant competitive
advantage for industries that are capable of achieving it, and in the construction industry we are seeing
some progress in electronic tender management and collaboration. However, at the business process
level and from the perspective of supply chain management, very little progress was noted at the prime
and trade contractor levels other than the use of email to send purchase orders.
- 25 -
Snapshot – Integration platforms for business processes

Industry-wide integration platforms such as Quadrem provide an information technology
backbone for business process integration and transaction execution. This allows buyers and
sellers to collaborate electronically through the entire procurement-to-payment cycle,
regardless of their technological sophistication and their existing investment in systems and
processes. Individual company initiatives have also been considered in the construction
market, but no complete solution has been devised that provides the business-to-business
connectivity required to support the range of existing relationships.
This concept was discussed with all participants, and the responses reflected polar opposites
of opinion. On one side was a view that the fragmentation of the market would never allow
such integration, because the many small players who dominate the sector would never
acquire the skills and sophistication needed to adopt and benefit from such a business
model.
At the other end of the spectrum was a much smaller camp of progressive companies. These
understood the potential of process streamlining, which would let project managers focus on
critical management activities while allowing routine transactions to take place according to a
mutually agreed-upon set of business rules
Given the direction that the major buyers in the supply chain are taking, it is possible that
construction industry developments may repeat those of the manufacturing industry. In the
latter sector, supply chain networks evolve around large buyers, creating relatively closed
trading communities that limit the benefit of such technologies to these buyers. This leaves
the small and medium-sized enterprises (SMEs), which dominate the Canadian construction
sector, with a limited ability to benefit from inter-SME trade. As a result, the possibility of
developing an industry-wide platform to provide some level of transaction integration
represents a still-untapped opportunity.
The good news is that the most progressive companies are looking at ways to use Internet technologies
to eliminate or streamline the processes that touch on outside parties. In the manufacturing part of the
supply chain, data-driven process integration is more apparent, with some sophisticated manufacturers
and many large distributors using automated stock replenishment systems and some online invoicing.
A few respondents mentioned the use of electronic data interchange (EDI) integration with suppliers, a
process usually driven by supplier initiatives. Most of these suppliers are in the commodity and
intermediate goods segments of the supply chain, such as cement and steel. Internet-based
procurement technologies, however, are scarce. The use of global procurement sites and supply chain
management and payment platforms such as Do2.com, Quadrem, MFG.com, globalsources.com and
alibaba.com, remains nascent, although indirect spending is more likely to be managed using
electronic tools. Some electronic order placement occurs between trade contractors and wholesalers
(mostly large electrical and plumbing supply houses), but this typically represents only 5 to 20 per
cent of these wholesalers’ customers. Many of the wholesalers, however, had relatively aggressive
growth targets for moving customers from manual ordering channels to electronic alternatives.
- 26 -
The heavy construction industry represents the exception to this trend in e-commerce. Most heavy
equipment operators demonstrate a significant propensity to buy and sell heavy equipment using a
variety of Internet sites that focus on this niche.
Initiatives related to e-bonding and e-tendering demonstrate a growing inclination to adopt new
business process technology. Some of this represents long-standing projects, and general interest in
these technologies remains rudimentary, but they may be the proverbial thin edge of the wedge that
presages a wider adoption of e-services.
When asked about investment intentions, most firms in the services segment of the supply chain
indicated a desire to invest in mobile technologies such as GPS and remote connectivity, rather than in
supply chain integration. Large general contractors generally represented those most interested in
integration technologies and supply chain efficiency enhancements.
Compliance
Few organizations showed any concern about compliance. Most indicated that the major compliance
issues relate to statutory declarations, which are often a condition of payment, and labour mobility.
The latter issue was important to respondents with experience in exporting, since they must manage
the risks of having their employees refused entry into foreign markets. These companies noted the
critical importance of having a competent immigration lawyer to deal with this risk. While not
explicitly saying as much, some respondents left the impression that the challenges of gaining access
to foreign markets contributed to their decision to stay in Canada.
Despite industry literature that describes potential threats from counterfeit electrical and plumbing
supplies not approved by the CSA or UL, most trade contractors indicated only limited concerns about
this issue.
Some product manufacturers stated that a barrier to exporting lies in the need to have products
approved for use on those markets. This can be time consuming and costly.
- 27 -
Critical supply chain risks

Major operational gaps and risks can be divided into the six general categories shown in Table 3.
Many of the responses in the table have been covered elsewhere in this report, but are repeated here
for completeness.
Table 3. Key Supply Chain Risks
Risk Type Common Manifestations
Human resources  Limited availability of qualified staff and subcontractors

 Limited skills of procurement staff
 Weak cross-functional collaboration
Business processes  Poorly defined business processes outside of project management
 Failure to follow stated processes across distributed offices
 Limited adoption of management tools
 Weak technology for process management, resulting in strongly
manual processes and numerous failure points
 Poor visibility into supply chain conditions
 Significant expediting required
 Weak information exchange
Schedule management  Unrealistic demand planning and lack of load balancing
 Poor demand planning and materials management
 Change orders that create significant difficulties in meeting schedules
 Long lead-time item management
 Weak information exchange
Price volatility  Fluctuation in commodity prices at unprecedented levels wreaks havoc
on estimating and procurement functions, creating major tendering and
project execution risks
 Transportation cost increases due to fuel costs and surcharges
Supplier performance  Failure of manufacturers to adhere to production schedules
 Consolidation in the supplier base limits choices and reduces the
buying power of contractors
Financial issues  Failure to manage cash flow adequately, which affects operational
flexibility
 For heavy construction companies, inability to obtain equipment
financing poses a very serious threat to performance
Gaps in human resources and business processes were the issues most frequently mentioned. Many
respondents felt that some of these issues were out of their control, so they were not actively investing
in dealing with them. This attitude was particularly apparent among smaller firms.
- 28 -
The number of third-party-based risks is reflected in the litigation that occurs in the industry, and
highlights the importance of adequate contracts between buyers and sellers. It also emphasizes the
importance to the sector of its legal services segment.
5. FINANCIAL SUPPLY CHAIN
Payment risk — Payment is perhaps the most contentious issue in the construction industry. The pay-
when-paid approach is a core practice for those that employ it, or that are compelled by legislation in
certain jurisdictions to employ it. It can cause serious payment delays and, as its effects cascade
through the supply chain. Oddly, despite this and other challenges to getting paid, few respondents
said that they used accounts receivable insurance.
While many companies vehemently oppose the concept of pay-when-paid, and will strike it from any
contract, they (especially contract management firms) still face two major challenges in maintaining
their cash flow:
 Narrow windows for document submission; many owners and prime contractors have fixed
dates and windows for making payment on the previous month’s invoices. Unfortunately, the
windows are often so narrow that the parties involved cannot complete the documentation and
submit it to the owners for payment within the time allowed. As a result, while the process
should ideally require 30 days, it often takes longer due to the failure of one or more parties to
meet the prescribed cut-off dates. Payment therefore slips to the owner’s next billing cycle,
and the contractor’s cash flow suffers.
 Withholding payment to extract performance, often to ensure that deficiencies are corrected, is
common. Some trade contractors and suppliers claim that the right of offset is frequently
applied when they are working on more than one project for the same owner, so that when
deficiencies arise on one project, the owner withholds payment for work completed on
another.
Most payment issues tend to exist in the general and trade contractor segments of the supply chain.
Wholesalers and suppliers specifically mentioned payment delays (less so disputes), often referring to
longer than usual payment delays, of 60 to 90 days in some cases. This is likely the result of what we
have coined the “payment bullwhip effect” where payment delays at the front end of the supply chain
with owners, general contactors and trade contractors cascade and escalate through the entire supply
chain resulting in significant delays at the manufacturer end of the supply chain.
Payment terms and methods — Payment practices differ depending on the type of supplier. Service
providers are typically subject to holdbacks of 10 to 15 per cent of the invoice amount; goods
suppliers, however, are not subject to holdbacks. It is generally recognized that the financial health of
- 29 -
trade contractors depends heavily on their cash flow and timely payment by their general contractors,
and trade contractors do acknowledge that some of the larger general contractors work very hard to
honour their commitments.
Given these circumstances, managing cash flow is among the most critical activities undertaken by
companies in the supply chain. Respondents said that most bankruptcies in the sector do not occur as
a result of losses, but rather because of poor cash flow management. The most frequently cited reason
for slow payment is not a delay caused by a general or trade contractor, but is rather a delay on the part
of the owner.
Holdbacks can be a major problem. For many contractors, the 10 per cent that is retained represents
the entire profit on the contract, and payment can sometimes (albeit infrequently) take years because
of disputes that are outside the contractor’s control. Some companies are consequently interested in
instruments that will guarantee payment when they have met the contract terms and satisfied their
obligations.
Given the largely domestic structure of the industry, payment on open account is the standard method.
Letters of credit are sometimes used in offshore procurement, although larger contractors are
encouraging the use of open accounts in established overseas relationships so they can benefit from
the lower costs of this method and can be paid via wire transfer.
A development worth noting, with respect to foreign supplier payment, is the reluctance of Chinese
suppliers to provide terms of any type. Many buyers have indicated that these suppliers often demand
an up-front payment of 25 to 50 per cent of the order’s value, and require the remaining 50 per cent
before releasing the shipment or before delivering the shipping documents. Given the sometimes
lengthy transportation times associated with such orders, these demands are a financial challenge and
constitute a risk for many Canadian importers.
The vast majority of buyers pay by cheque so they can physically control the disbursement of funds.
This allows them to manage cash flow and to force service providers to address deficiencies before
being paid. However, some progressive buyers are making use of electronic funds transfer (EFT) to
lower transaction costs and increase cash flow velocity within the supply chain. Even so, few appear
willing to move to the next step — an automated reconciliation approach that would automatically pay
undisputed invoices within a pre-negotiated time period after the acceptance of the goods.
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Snapshot – Emerging Opportunities in Supply Chain Finance

Supply chain finance (SCF) seeks to integrate capital more efficiently and effectively into a
supply chain and increase cash flow velocity within the chain while lowering the cost of
capital throughout it. It is transaction financing based on information flow and on an
understanding of supply chain risks and interactions.
Its success is contingent on creating stable supply chain networks that fundamentally alter
the risk profile from payment risk to supply chain performance risks related to on-time
delivery, supply chain agility, quality and performance. Frequently referred to as Data
Triggered Finance, the concept revolves around a financial transaction that is triggered by an
event. Different types of SCF exist and are often coupled together depending on the needs
of the buyers and sellers. Common SCF approaches include:
 Invoice and accounts payable discounting — This is discounting based on approved
invoices and on leveraging the credit risk of the buyer, as opposed to that of the
supplier;
 Vendor managed inventory (VMI) — In this approach, replenishments and payments
are triggered by preset inventory levels and inventory consumption;
 Raw materials financing / purchasing programs – In this model, buyers and
importers provide purchasing support such as access to the volume discounts and
favourable terms enjoyed by large buyers. They also provide direct lending and the
support of their financial institutions in lending to LCC suppliers, which helps to mitigate
capital constraints, provide lower-cost financing and reduce input costs.
SCF often, but not always, leverages technology investments that facilitate the exchange of
electronic documents such as purchase orders, invoices and acceptance notifications among
members of a supply chain cluster. More specifically, it uses the “visibility” created by the
platform to increase the level of trust in the trading relationships. This trust can exist because
all participants can access the same trade data on demand. It also uses the data to create
payment triggers that are based on specific events and contract terms, thereby diminishing
traditional payment risks.
SCF seeks to redefine the procure-to-pay and order-to-cash processes by creating a win-win
scenario for all parties. It achieves this by reconciling the needs of buyers and sellers, as
opposed to the traditional, adversarial procurement model that pits them against each other.
Bonding — Risk migration is a vitally important component of the supply chain, which is well
serviced by surety providers. A key concern for the sector lies in the increasing use of standby letters
of credit (SL/C’s) instead of surety bonds, mostly as a result of increased foreign concessionaire
involvement in the Canadian construction market and in 3P projects. This has a considerable effect on
the ability of Canadian general contractors to bid for these projects. Since SL/C’s are issued by
financial institutions, they require collateral that a general contractor may be unable to provide because
of limited access to operating lines of credit and/or lack of cash. This can create a significant gap in
the ability of Canadian firms to bid on major infrastructure projects.
Working capital management — While managing cash flow is a concern for most companies in the
sector, integrated working capital management is used mostly in the commodity, manufacturing and
distribution segments of the supply chain. A tight focus on inventory is a key performance metric for
many of these companies.
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Every respondent was asked to choose between taking a discount on an invoice, or obtaining extended
payment terms, such as being able to pay in net 90 days. Almost universally, respondents (especially
the contractors) opted for the discount, thus highlighting the industry’s preference for minimizing
costs over optimizing working capital. This may also indicate that the majority of firms possess strong
cash positions.
Snapshot – Taking Purchase Discounts

Many supplier and contractors will discount aggressively to accelerate payment. Whenever
possible, most general and trade contractors take advantage of these early payment discounts
to reduce overall costs, and use whatever liquidity they have in order to do so. A substantial
number of respondents reported difficulty in actually taking the discounts, however, because
liquidity constraints delayed the processing of their accounts payable and this in turn caused
them to miss the discount window. Statistics quoted by some respondents showed that 25 to
60 per cent of their customers took advantage of the discounts.
Access to capital — Most respondents reported healthy working capital situations, with general and
heavy construction contractors describing strong liquidity. This positions many of the companies to
weather the weak demand conditions that currently prevail.
This management philosophy also reflects the perception that support from financial institutions,
especially in the services segment of the supply chain, is quite limited due to the relatively high risks
in the construction sector. Few general contractors, for example, can secure significant operating lines
of credit from financial institutions because of their limited ability to provide collateral. During the
interviews, it was not unusual for general contractors with over $50 million in annual revenues to
report operating lines of credit of under $1 million.
Most contractors claim to operate on a positive cash flow basis. This is not surprising as the industry
employs a practice called “front-loading” to ensure that billing always exceeds costs at the beginning
of a project.
While credit access may not be a problem for general contractors due to their management practices, it
is an issue throughout the rest of the sector. As this study was concluding, heavy construction
companies were reporting difficulties in obtaining equipment financing.
The distribution and wholesale areas also attract close financial monitoring. These represent the
inventory buffers for the industry, and absolutely must have access to operating credit so they can
meet the just-in-time service requirements of the sector. As progressive distributors, wholesalers and
manufacturers adopt more efficient inventory management tools (such as VMI); dependable inventory
financing becomes even more crucial to developing the overall efficiency of the supply chain.
- 32 -
6. GAPS ANALYSIS
Using the GTM supply chain solution model 6 shown in Figure 4, 7 service gaps can be separated into
five categories of key activities in SCM: financing, risk management, compliance, connectivity, and
information and value-added services.
Figure 4 - The Supply Chain Framework
Buyer Supply Chain
Plan / Invest Source & Supply Chain Inbound Project Invoice Payment
(Long-term Capital) Procure Risk Mgmt. Logistics Execution Processing
Cash & Working Capital Mgmt.

Financing (Inventory Financing for Dist & Mfg., CDIA capital, cash flow accelerators, technology investment)
Risk Management (supply chain disruption risk mitigation, S L/Cs, 3P projects, managing foreign projects)
Compliance Management (certification of products for other jurisdictions)
Connectivity (Low level of cross-enterprise integration)
Information & Value-added services (export propensity, sourcing support, procurement skills)
Plan / Invest Sell & Supply Chain Outbound Project

Invoicing Collection
(Long-term Capital) Negotiate Risk Mgmt. Logistics Execution
Supplier Supply Chain
A review of this supply chain’s dynamics reveals a variety of gaps across a broad range of needs.
Financing — The inconsistent level of support by financial institutions is an overarching issue for
contractors, and makes cash management a critical success factor for many of these firms. Smaller
firms are perceived to have the weakest cash flow management practices and thus the greatest risk
profile; these could benefit by adopting additional tools and processes.
Beyond this structural problem, the gaps appear as niches within the overall financing context. These
niches include the following:
6
When conducting business, buyers and suppliers interact through an interdependent and interrelated set of value-creating
activities such as sell/buy, ship/receive and pay/collect. The key elements of these supply chain interactions include
financing, risk management, compliance and information exchange, as well as the information and trade development
services that govern a supply chain’s effectiveness and efficiency. These elements form the basis for the GTM model’s
solutions, which are intended to facilitate the execution of transactions.
7
Adapted for the construction industry. Note that the model is slightly different for manufacturers, where the
Inbound/Outbound Logistics and Project Execution segments of the chain are reversed.
- 33 -
 Inventory financing support for distributors — As the industry moves toward more advanced
inventory management models, it needs greater and more consistent support from financial
institutions in the area of inventory financing. Such improvements would allow this component
of the sector to provide more value-added solutions for contractors, thereby increasing their
ability to insert themselves into international supply chains. Similarly, it could also be
incorporated into export solutions to assist exporters provide support to foreign distributors
thereby increasing their overall value propositions to these foreign partners.
 Investment capital — This is needed to support foreign expansion either in the form of
acquisitions or in the opening of new offices abroad. This gap results from financial
institutions’ lack of knowledge about such investments and a limited appetite for the risks
associated with them. Investment capital could be either debt, which would be the likely
borrower preference, or patient capital in the form of equity or subordinated debt. This would
act as an enabler for the sector, and would probably increase its interest in growing into
international markets.
 Cash flow accelerators in the supply chain — Supplier payment programs are a potential tool
that is under-adopted by both financial institutions and buyers in Canada. 8 Adopting supplier
payment programs would facilitate the taking of discounts that all players rate very highly as a
way to extract greater value from their supply chains. Similarly, there is a gap related to the
release of holdback funds; this prevents many contractors from realizing their profits until long
after they complete a project, and this in turn hampers their ability to reinvest in expansion.
 General working capital facilities — General and trade contractors noted a gap in the
availability of working capital financing.
 Creative use of SL/Cs — The predominant use of sureties in mitigating performance risk in
North America has limited the industry’s knowledge of SL/Cs as a substitute for them.
However, with the increased participation of Canadian firms in projects abroad, and the
increased presence of global owners in North American projects, SL/Cs are becoming better
known. Using them, however, creates a working capital challenge for contractors. The
requirement to post 100 per cent collateral to the financial institution issuing the SL/C can
significantly constrain working capital for extended periods of time and create major cash flow
problems.
Despite the growing knowledge of SL/Cs, many respondents remain unaware of their potential
for mitigating performance risk, accelerating payment and converting L/C payments to open
account. Above and beyond providing performance security, SL/Cs can be used for the
following purposes:
o They can provide an alternative to the cash deposits required by host country governments
for importing labour into these countries. These deposits consume liquidity that could be
recovered by substituting an SL/C to secure the obligation.
o They can address unfavourable payment terms from risk-averse foreign suppliers who
require L/Cs or COD orders to ensure payment, practices that lead to extra cost and
suboptimal use of working capital. Few companies have considered using SL/Cs to convert
suppliers to open account, which they can do by using an SL/C to insure the supplier
against non-payment by the buyer.
8
Research by the EDC GTM CoI in 2008 points to a growing structural gap in this area as financial institutions (FIs) and
large buyers around the world increasingly adopt cash flow accelerators, such as supply chain finance, within the supply
chain. Larger Canadian enterprises and FIs are much earlier in the adoption curve for such services, creating a potential for
a structural gap.
- 34 -
o They can secure warranty obligations over an extended period of time.

o They can monetize delayed holdbacks during the resolution of a dispute or during the final
acceptance of a project.
 Technology investment — Limited availability of investment capital causes suboptimal levels
of investment in business process integration. Although there may not be gaps in the
availability of financial instruments for investing in technology, qualitative analysis indicates
that underinvestment is in fact impeding profitability, growth and entry into new markets, and
that this problem is becoming acute at the SME end of the spectrum.
Risk management — There are several gaps in this area, including the following:
 Supply chain interruptions — Volatility in input costs, unpredictable supply, uncontrollable
delivery delays and the variable quality of foreign-supplied goods concern most procurement
managers because they represent significant costs and, therefore, lost margin. Late delivery and
quality problems are major barriers to increased LCCS adoption, despite the acknowledged
cost benefits. Firms are therefore under-leveraging this opportunity to reduce their input costs.
 Risk in foreign markets — Many exporters highlighted the perceived risks not only of
managing projects in foreign countries, but also the challenges of establishing offices in high-
growth, emerging markets. While the risk of expropriation in these markets is relatively low,
exporters still want ways to insure their investments against potential losses arising from the
actions of foreign governments.
 Access to risk management instruments — The tendency for smaller players to use less-
sophisticated risk management tools is a potential efficiency gap in the market. High costs
appear to drive this limited usage, especially among SMEs.
 Public-private partnerships (P3) project risk — Emerging payment risks in P3 projects are
also a source of increased concern and potentially lost opportunities for Canadian companies.
They are deterred not only by the complexity and risks of these undertakings, but also by the
limited legal recourse that they, as the private partner, would have in the event of a dispute to
enforce payment.
Compliance management — Compliance gaps are relatively limited, since many firms avoid the
associated risks by choosing not to export. The gaps that exporters did identify related to fragmented
regulatory environments and the need for ways to increase workforce mobility.
One specific issue does exist for goods exporters. This is the problem of acquiring product
certification for new markets, a process that is often both costly and murky. Many manufacturers work
closely with their distribution partners to share the costs of certification. In foreign markets, however,
this approach tends to produce suboptimal results because of the local availability of alternative
products.
Connectivity — Few companies have developed any significant degree of connectivity in their supply
chains. They also do not anticipate investing in this area due to other investment priorities and the
perceived structural barriers to integrating supply chain processes. However, new procurement
outsourcing models and the availability of tools such as software-as-a-service (SaaS) can make such
investment quite attractive due to its low acquisition cost and its on-demand nature, which together
- 35 -
can reduce IT investment and internal IT management needs. Even so, few supply chain participants
outside the distribution segment, the large general contractor segment and the heavy equipment
segment are even aware of the Internet-based tools that could help them with their procurement
activities.
Information and value-added services — Because of the sector’s relationship-based and pull-based
sales model, there are substantial gaps in developing and executing export sales strategies. Finding
opportunities and building relationships remain a challenge for many firms, and they are lacking the
kind of integrated opportunity matching that would help qualified, export oriented firms find
customers.
Global sourcing continues to be a challenge. This is especially true for mid-market and smaller
companies without the necessary expertise and whose buying scale is limited. Promoting overall skill
development in procurement would also encourage the introduction of new tools and processes on a
wider scale than is now the case.
7. OPPORTUNITY RECOMMENDATIONS
There are many opportunities that would help close the gaps. Taking advantage of them would deliver
more investment in structural capacity and capabilities and more support for enhancing supply chain
efficiency. These are summarized in Table 4, including the potential benefits to firms and described in
detail in Tables 5 and 6 respectively.
Table 4. Opportunities Portfolio Summary
End-user Benefit
Opportunity/ Initiative Working Technology Trade
Revenue Cost Risk
Capital / / Process Facilitation /
Growth Reduction Mitigation
Financing Innovation Information
Structural Capacity/Capability Building Solutions

Consortium Builder Program     
SCM Education Partnership  
Construction SC integration platform     
Support IT Advisor  
Tactical Transactional Support Solutions
S L/C & Bonding Opportunities  
Global Sourcing & Procurement Support  
Supply Chain Finance for Construction   
Foreign Market Compliance Assistance   
Supplier Performance Risk Mitigation   
- 36 -
As a catalyst, the CCA could encourage the industry and its constituents to focus on supply chain
operations and investments. It could do this by creating a “Construction Supply Chain Leaders Round
Table” of 10 to 15 supply chain members who would engage the industry in documenting best
practices and in setting investment priorities for sector associations and other industry constituents.
Investment in capacity/capability building solutions
Table 5. Structural Capacity/Capabilities Opportunities
Initiative/Concept Description
Consortium Canadian companies can successfully sell products and quality services into
Builder Program foreign markets. However, the vast majority of companies do not possess the
resources or the strategic orientation to effectively generate business abroad.
While many of the exporting respondents did describe strong overseas
strategies, they also face the challenge of finding the right resources in foreign
countries to help them win projects and deliver sales.
Potential CCA value creation opportunity: The Consortium Builder Program, a
managed service delivered in partnership with other sector associations and
with EDC and DFAIT, could be designed to provide an integrated solution to
this issue. It would provide active and passive lead generation, a service to
build a roster of export-focused and qualified Canadian contractors and
suppliers, and methods for matching them with projects and buyers.
The model could include “high touch” and “low touch” approaches to lead
generation and matchmaking. The high-touch model could be delivered
through alliances with organizations such as DFAIT and EDC, and focus on
trade missions and transaction facilitation, while the low-touch approach could
work through a technology platform that provided a centralized repository of
lead, project, supplier and buyer qualifications for access by CCA members.
Snapshot – Online Directory Project
The International Committee’s Online Directory project represents a key

asset for the Consortium Builder Program. The Consortium Builder can
add value to this basic investment by creating additional structural export
capacity, and by becoming a platform from which additional value-added
services can be developed or distributed.
The lead generation, matchmaking and qualifications management features of

the Consortium Builder could be further enhanced by the creation of Canadian
consortia to provide turnkey solutions for foreign buyers. In the longer term,
the technology platform could provide the backbone for the electronic delivery
of risk management, financing and other solutions, and could become a value-
added service for both Canadian exporters and their foreign customers by
simplifying and enhancing buyer-seller business processes.
- 37 -
Industry-wide While many respondents were somewhat sceptical about using process
Supply Chain integration technologies in the procure-to-pay lifecycle, the most innovative
Process firms are now moving in this direction. Many smaller respondents were
Integration enthusiastic about the potential efficiency gains, especially if they could be
Platform
linked to accelerated cash flow. While the industry lags behind other sectors in
Development
the adoption of this type of technology, this lag actually represents a positive
situation since the industry does not yet possess the large investments that
would constitute a barrier to entry.
One of the largest barriers to technology investment will be capital cost and
return on investment. Many firms can look to software-as-a-service (SaaS)
vendors to defray the initial cost, as these vendors operate on a subscription
basis. 9 For those looking to make proprietary systems investments, financing is
available for such projects from banks, from some leasing companies and from
the Business Development Bank of Canada.
It may be challenging to build a critical mass of supplier participation in such
technology projects, but doing so is crucial to their success. Industry
associations have an advocacy and facilitation role to play in this area, a role
that could easily be expanded to encompass the sponsorship of a technology
that would allow companies to carry out transactions electronically. By
bringing enough buyers and suppliers to the table, such a project could
dramatically lower the adoption barriers that often plague similar initiatives.
Given the fragmented nature of the Canadian construction landscape, the
benefit of these solutions lies in enabling the majority of buyers and sellers to
take advantage of increased process integration. A many-to-many solution (as
opposed to big-buyer-driven solutions that can create discrete supply chain
networks) appears to offer the greatest value to the entire industry because it
allows SMEs to interact with each other while allowing larger players to
leverage their existing investments.
Potential CCA value creation opportunity: As a potential initiative, a
feasibility analysis and pilot project could use the unique reach of the CCA to
act as a sponsor and promoter of a Canadian construction supply chain
integration platform. Suitable technologies are widely available, and success
lies in developing operating models that deliver high returns on their users’
investments. The long-term value lies not only in improving transactional
information exchange, but in coupling it with cash flow acceleration, financing
and risk management solutions that can be delivered through, or enabled by,
the platform itself.
For companies that want to transform their supply base into a strategic asset,
9
SaaS is a software distribution method that provides access to software applications through the Internet. Since SaaS pricing
is based on a monthly fee, the service allows organizations to use these applications at a cost that is typically lower than
purchasing them outright. SaaS eliminates the costs of installation, set-up, maintenance and additional hardware because the
vendor takes responsibility for these items.
- 38 -
this type of initiative represents a high-value opportunity. In order to obtain the
greatest value from this technology, however, most companies will need to
develop rigorous procurement and management processes before they adopt it.
Supply Chain Most firms in the sector do not treat their supply chain as a strategic asset.
Management Direct procurement is generally a tactical function within the overall project
Education management function. Companies are also currently being squeezed by a skills
Partnership shortage.
Potential CCA value creation opportunity: The CCA can collaborate with
organizations such as Supply Chain and Logistics Canada (SCL), the
Purchasing Management Association of Canada (PMAC) and the Supply
Chain Sector Council maintained by Human Resources and Skills
Development Canada (HRSDC). Such collaboration could help set up
development programs to enhance the SCM skills of sector participants.
This training could be supplemented by tools for recruiting experienced
procurement and supply chain staff from other, more mature sectors. The CCA
could also develop a best practices guide for construction procurement and
SCM.
Technology As noted, technology investment is a priority for some firms and should be for
Vendor Directory others. However, discussions with executives indicated that few were aware of
(Construction IT the breadth and depth of the solutions available to the sector.
Advisor) Potential CCA value creation opportunity: There is significant value in
creating a directory of industry-focused tools to address the needs of the sector
and to promote the adoption of supply chain management and other
automation tools. Rather than employ a vendor sponsorship approach, a more
compelling value proposition lies in having an impartial third party, such as a
market analysis firm, compile the directory and perhaps develop case studies
examining how these tools have been applied.
Supporting supply chain efficiency enhancement activities

While the creation of service partnerships is not something that the CCA or its association members
can necessarily deliver themselves, success in building supply chain effectiveness and efficiency can
be enhanced through such measures. In this context, the CCA can seek to establish and promote
programs and relationships that provide members with access to the necessary services. These services
would also be customized to the needs of the participants. Such programs might be established on a
revenue-sharing basis to provide additional income to the CCA.
- 39 -
Table 6. Supply Chain Efficiency Enablement

Initiative Description
Standby Letter of While the North American market relies on sureties for performance risk
Credit / Bonding mitigation, there is considerable concern over the use of SL/Cs as performance
Opportunities securities, and over the ability of Canadian companies to provide them given
their impact on working capital.
Potential CCA value creation opportunity: Education about the use of such
instruments, in the form of a short guide, would allow firms to become more
comfortable with the tool and allow them to build appropriate management
practices to employ them. Additionally, some of the gaps outlined in this
report lend themselves to use of SL/Cs, including:
 accelerating payments of holdbacks while unrelated issues are resolved;
 providing performance security guarantees to foreign concessionaires and
owners when sureties are not acceptable;
 replacing cash deposits to foreign authorities on export contracts, such as the
deposits required in the Middle East for imported labour;
 providing warranty protections to owners and buyers; and,
 securing better payment terms from foreign suppliers who are currently
seeking large deposits or payment-on-documents terms.
Given how important the providers of risk management services are to the
CCA and the industry, it might be worthwhile for the CCA to explore how
surety firms may be wiling to help construction companies address these gaps.
- 40 -
Global Sourcing Few companies appear to use the global sourcing groups and trade agents that
and Procurement specialize in offshore procurement and supply chain management, so a
Support significant opportunity lies in helping the sector’s SMEs use these resources to
leverage LCCS more effectively. This could be achieved at an association
level by building links to credible, established sourcing and procurement
organizations, including online sourcing tools such as www.mfg.com,
www.globalspec.com, www.globalsources.com, www.quadrem.com and
www.ariba.com.
Similarly, given the small and regional focus of many firms, the creation of
buying groups such as those that exist in other industries and in geographic
markets would allow companies to acquire bulk, MRO and other non-strategic
goods more cost-effectively. The concept does not have much appeal to the
participants in this study, however, and perhaps deserves increased promotion
through studies of best practices in other industries and countries. Companies
that do seek to pursue this avenue can use their local/regional industry
associations — and potentially those of other industries as well — to develop a
network of like-minded businesses that want to develop such buying groups.
A similar benefit could be achieved through increased exposure to, and
education about, the value of third-party procurement outsourcers such as
BuildDirect.com.
Potential CCA value creation opportunity: The CCA’s role could lie in
catalyzing the use of these tools through collaboration with the relevant
vendors. This could be done through a referral program or even through
co-marketed programs. Additionally, the CA could also create best practices
guide for sourcing in the construction market (which would be complementary
to the education path suggested above).
- 41 -
Supply Chain While it is a relatively new concept and has limited availability for SMEs,
Financing (SCF) companies should be exploring SCF as an approach to generating enhanced
working capital management and reducing costs. This would also allow them
to deal with foreign suppliers from a stronger position, or at the very least not
be hampered by tight payment terms.
SCF involves balancing the objectives of both suppliers and buyers from the
perspectives of terms and cash flow. It can include invoice discounting at very
attractive rates, vendor managed inventory and use of SL/C’s to improve
payment terms.
Snapshot – Focusing on collaborative procurement

The traditional procurement model often produces suboptimal
procurement, since the more powerful buyer seeks to extract concessions
on price, payment terms and delivery from the weaker supplier. This
shifting of costs to the weaker participant actually increases the cost to the
buyer, since the supplier will naturally incorporate its higher cost of capital
into the cost of the goods. Moreover, in extracting such concessions, the
buyer weakens the overall strength of the supplier, thereby increasing the
long-term risk of supply chain disruptions. SCF-based procurement seeks
to balance the objectives of both parties to achieve their respective
objectives.
Buyers
For buyers, SCF can:
 minimize investment in working capital by increasing days-
payables-outstanding (DSO) and reducing inventory levels;
 reduce input costs, since many buyers report being able to negotiate better
discounts due to tighter and more formal buyer/supplier relationships under
SCF;
 reduce borrowing costs, since total borrowing declines due to smaller
investments in working capital; and
 increase the stability of the supply chain, as buyers no longer shift their
risk to the smallest, weakest member of the chain.
Suppliers
For sellers, SCF can:
 reduce accounts receivable by offering early payment opportunities —
essentially, on-demand payment is available;
 reduce costs by leveraging the lowest cost of capital in the supply chain;
 increase the certainty of cash flows though defined payment terms and,
when technology is deployed, better visibility into payment status;
 increase the strength of the customer relationship.
Potential CCA value creation opportunity: The direct opportunity for CCA is
relatively limited. It may have an educational role in describing the new
financial services available to the sector. Additionally, it could seek to partner
with preferred financial service providers that are willing to work with sector
participants on addressing the sector’s needs for cash flow management.
- 42 -
Foreign Market Issues of legislative, labour and safety compliance are often the largest barriers
Compliance to successful market penetration abroad. The costs of complying are frequently
Assistance prohibitive and limit smaller companies’ capacity and desire to target foreign
markets. While financing options in these areas are limited, companies should
look to the Business Development Bank of Canada (BDC) when possible, and
try to extract the most from R&D tax credits to defray the costs of their
development programs.
Potential CCA value creation opportunity: The CCA could approach the BDC
and other lending institutions to create a targeted foreign market compliance
solution. This would allow Canadian companies (primarily in the
manufacturing segment) to finance product development for foreign market
compliance. Ideally, such a solution would be structured as a term loan
repayable over a five-year term. Other possibilities might be principal
repayment deferrals for the first year or two, or royalties based on sales
volume in the foreign market.
Supplier Supplier performance, at all levels of the supply chain, plays a crucial role in
Performance Risk the overall success of companies. Many companies shy away from LCCS, for
Mitigation example, due to past experiences or concerns about a foreign supplier’s failure
to perform. It is clear that products such as Specification Compliance
Insurance, performance guarantees, bonds and other tools are used only in
exceptional circumstances by smaller companies. Additional product
development is obviously required in the risk management and financial
services sector to address the increased risks to SMEs, and a collective
direction is needed to steer these investments.
Snapshot – Specification Compliance Insurance
Specification Compliance Insurance covers the ultimate risk that

manufactured goods may be found, after arrival at the buyer’s site, not to
be as ordered. The insurer will pay if the goods are not in accordance with
the specifications, thus covering the financial loss to the buyer or its
lenders. This coverage is an extension to a regular all-perils marine cargo
policy; its main requirement is an inspection at the point of production by
the insurer's designated auditor.
Potential CCA value creation opportunity: The CCA’s role can span multiple
opportunities to increase the awareness and adoption of supply chain risk
management tools. It could provide a directory of risk management tools and
referrals to suppliers, act as a focal point for sector-specific solution
development with third-party providers, and provide education about supply
chain risk management.
- 43 -
CONCLUSION
Although it is domestically and regionally focused, the construction sector offers opportunities to
deliver new solutions for a broad array of issues, especially given the complex needs of the sector and
its crucial concerns with risk and cash flow management. The key opportunities for the CCA and other
sector associations lie in focusing on structural enablement for exporting, importing and supply chain
management. Establishing partnerships to drive solution development and service delivery, and thus
increase the breadth and depth of the sector’s marketplace capabilities, is a highly effective means of
addressing the challenges identified in this report.
EDC INTERNAL USE ONLY

Page 44
APPENDIX 1: SUPPLY CHAIN STRUCTURE

Transportation Warehousing / Import / Export Customs
Services Logistics Control Brokers
Energy
Insurance /
Surety /
Bonding
Trade
Contractors
Consulting
Architectural
Engineers
Services
Petroleum Products /
Petrochemicals
Building Mtls
Manufacturers
Building Materials
General Private Sector
Intermediate Distribution
Contractors Owners
Commodities
Raw Mtls
Value-added
Commodities
Equipment Rental
Public Sector
Owners
Equipment Dealers Heavy
Specialized Construction /
OEMs Services Road Builders
Equipment Lenders/
Core Supply Chain MRO vendors Financing Investors
Legal
Secondary Supply Chain Services
Page 45
APPENDIX 2: SUPPLY CHAIN PARTICIPANT CHARACTERISTICS

Company Core Upstream Supply Downstream Financial Value Technological Global Trade
Type Characteristics Chain Supply Chain Chain Sophistication Propensity
General
Contractors • Multi-regional / national • Generally decentralized • Selectivity increasing • Strong cost reduction • High to very high Exports
operations procurement due to deteriorating bias internally IT adoption • Moderate. Expansion
Large
• Supply chain anchor • Tactical, project focused • Value and customer • Seek to support supply  Project management generally in North
• Asset-light procurement with some satisfaction oriented chain by focus on timely and document America.
 Some self-perform strategic sourcing • Very focused on payment management focused • Acquisition and
• Some employ multi- timeliness of project • Limited integration with replication are favored
year, national contracts execution due to business partners models
for certain inputs penalties arising from Imports
• Most procurement delays • Increasing usage of
delegated to trade offshore sourcing
contractors
SME • Local / regional • Tactical, project focused • Selectivity increasing • Extreme cost reduction • Moderate to high Exports:
operations procurement • Customer satisfaction focused internally IT adoption • Very limited
• Asset-light • Limited ability to create and cost focused • Front loading of  Project Imports:
 Some self-perform economies of scale invoicing to improve management and • Indirect imports through
• Most procurement cash flow document supply chain partners
delegated to trade • Construction management
contractors management focused focused
firms have very tight
cash cycles due to
invoicing time lines
Heavy • Asset intensive • Greater use of • Strong focus on • Strong use of leverage • Varied levels of internal Exports:
Contractors • Mostly regional in centralized procurement government business for asset acquisition IT sophistication • Generally limited
nature • Significant exposure to and large owners • Strong cash flow focus • GPS technologies for Imports:
• Majority of operations commodity price • Commodity price risk fleet and operational • Direct import of capital
self-performed volatility passed on to buyers in efficiency equipment
• Some have maintenance many cases
operations smooth cash • Increasing concern about
flows escalating warranty
requirements
Trade • Mostly regional in • While procurement • Price competition • Cost focused • Moderate level of IT Exports:
Contractors nature remain project based, dominates • Some concern about GC adoption. • Generally limited,
• Specialized strategic relationships • Focus on building payment practices and • Progressive firms are however some specialist
competencies with vendors are noted personal relationships timelines for invoice investing in IT and other firms (e.g. structural
 Scarcity provides • Require JIT delivery with GCs submission technology to drive steel erectors) have
some pricing control from distributors / operational efficiency strong export foci
manufacturers and flexibility (i.e. GPS) Imports:
• Limited direct imports,
extensive product import
through distributors.
Page 46
Company Core Upstream Supply Downstream Financial Value Technological Global Trade
Type Characteristics Chain Supply Chain Chain Sophistication Propensity
Engineering / • Wide range of scale of • Very limited goods • Key partner to GCs and • Fee for services • Relatively high level of • Global market focus
Architecture operations and sizes procurement except owners generally tied to work information technology ranges from low for
• Large firms also provide when acting as agent for • Concern exists with performed results in adoption smaller firms to very
turnkey services (acting buyers respect to continued more stable cash flow • Engineering, design and high from large firms
as procurement agent) • Influence client reduction in engineering • Focus on collections and document management
procurement decisions budgets and squeezed working capital focused
through engineering timelines which results management
decisions reduces drawing quality
Distributors / • Range from small local • Very focused on • Play critical role in • Working capital • Highest level of IT Exports:
Equipment providers to multi- developing and physical goods inventory management is critical sophistication in supply • Generally limited as
Sales and national global firms maintaining management and  Focus on cost, chain business model is
Rental • Multi-line and single manufacturer delivery inventory turns and • Focused on pushing regionally focused
line product distribution relationships • Implementing collections integration solutions to Imports:
models exist innovative inventory and • Concern exists with clients to increase online • Significant direct
• Service innovation and delivery models to respect to GC payment orders and low overhead importation from foreign
relationship are key improve service levels practices and • Equipment manufacturers
• Transportation cost undercapitalized trade
optimization is contractors
important • Increased credit
management occurring
Manufacturers • Range from raw • Supply chain integration • Focus on product • Working capital • Key focus on driving Exports:
materials providers to critical to reducing costs innovation for better management is key manufacturing • Canadian value added
value-added • Significant LCCS and performance and lower • Far removed from productivity manufacturers ate highly
manufacturers offshore sourcing cost ultimate customer and • Investment in IT is export oriented due to
• Transportation cost project cash flow important, but less so limited Canadian market
optimization is key to creating payment that process • Commodities harder to
getting product to concerns enhancement export due to
market • Increased credit transportation costs
• Lead times are a management occurring Imports:
challenge due to demand • Significant direct
in manufactured importation from foreign
products manufacturers as raw
materials
• Smaller manufacturers
concerned by risk of
LCCS despite desire top
pursue this strategy
Page 47

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R ESEARCH R EPORT

Supply Chain Dynamics and

Canadian Construction Sector

Global Trade Management Centre of

Supply Chain Structure

Supply Chain Operations

Financial Supply Chain

Gaps and Opportunities

 Export facilitation through Canadian consortium building services (assembling Canadian

 Development materials to educate sector participants on the potential applications of Stand-by

This report addresses a number of interests, including:

Figure 1 outlines the diversity of the respondents.

Figure 1 - Respondent Profile (n=65)

Risk Management Architecture /

Snapshot – The critical role of associations in the construction sector

Snapshot – Importing workers into the Middle East market

Asset-based versus non-asset-based firms — This is a fundamental difference between general

Construction Sector SWOT Analysis

Table 1. Sector SWOT Analysis

2. SUPPLY CHAIN STRUCTURE

Supply Chain Map

 buyers’ or sellers’ markets, which are controlled by the dominant organization;

Figure 2 - Construction Supply Chain Relative

Supply Chain Management Practices

Figure 3 - Construction Supply Chain Management Practices

Bldg. Products Mfg n Distributor / Project Financier

Bldg. Products Mfg n Distributor / Project Financier

Bldg. Products Mfg n Distributor /

Table 2. Canadian Construction Supply Chain Maturity Taxonomy

Maturity Level Key Characteristics Typical Canadian Company

Defined  Cross-project information sharing, but  Progressive SMEs, GCs and

Managed  SCM seen as part of corporate strategy  Large/leading GC and heavy

Controlled  SCM function is controlled, predictable  Few if any

Snapshot – Infrastructure projects and foreign investors

The three most common export models are:

 Engineering and architectural services exports — Canadian professional services

Snapshot – Importing workers into the Middle East market

Canadian direct investment abroad

4. SUPPLY CHAIN DYNAMICS

Upstream supply chain operations

The distribution segment is an excellent example of innovation in supply chain management.

Downstream supply chain characteristics

Key success factors

Adoption of information technology

In contrast to the relatively well-developed technology infrastructures within companies, inter-

Snapshot – Integration platforms for business processes

Critical supply chain risks

Table 3. Key Supply Chain Risks

Risk Type Common Manifestations

Human resources  Limited availability of qualified staff and subcontractors

5. FINANCIAL SUPPLY CHAIN

Snapshot – Emerging Opportunities in Supply Chain Finance

Snapshot – Taking Purchase Discounts

Figure 4 - The Supply Chain Framework

Buyer Supply Chain

Cash & Working Capital Mgmt.

Compliance Management (certification of products for other jurisdictions)

Connectivity (Low level of cross-enterprise integration)

Plan / Invest Sell & Supply Chain Outbound Project

Supplier Supply Chain

o They can secure warranty obligations over an extended period of time.

Table 4. Opportunities Portfolio Summary

Structural Capacity/Capability Building Solutions