What are long lead items in construction

Procurement Purchase order Software
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Long lead items (LLI) are items that have a delivery time of several months from order to delivery. For project-based companies these are important. They might impact the delivery schedule for the project and is vital for delivering the project on time.

 

Therefore, determination of what are long lead items is often done in the planning stage to ensure that components that have long lead times are assessed. Often long lead items also involve processes ahead of ordering that impacts the timeline, such as creation of technical drawing and approving these with clients.

What are typical long lead items?

Examples of long lead items can be

  • Custom fabricated items
  • Materials with specific certifications
  • High demand speciality equipment

How long lead items can result in cost overruns

Project agreements are often structured to ensure delivery according to an agreed delivery date. To impose an incentive to the contractor, commercial clauses are often structured to ensure that progress meets the delivery schedule.

Delays will then result in cost impacts if the project is not delivered in time. These might include:

Liquidated damages – where the company will be penalized by losing a percentage of the contract value depending on the length of the delay.

Delayed payment milestones – most often payments are scheduled around delivery milestones. If the delivery milestones are not met in time, these impacts when the company can invoice the client. Although the amount might be the same, delayed payment milestones might have a severe impact on the cash flow for the project.

Prioritized orders – some time suppliers can deliver long lead items faster if you are willing to pay your way earlier in the queue or by using alternative freight methods (e.g., air vs boat). This will again impact the cost in the project.

How to avoid cost overruns from long lead items?

  • Plan accordingly – Poor project planning is the number 1 reason for cost overruns in projects. Having a solid plan ensures that also long lead items are identified early. This can help to ensure that your project is delivered on time.
  • Assess risk – Assess risks that can impact the schedule or cost estimates. Maybe there are components that require certifications that can be hard to get hold of,or other client specific requirements that needs to be clarified early in the project. Also, you should assess if it makes sense to build inventory on certain items or purchase spare items so that you avoid the risk of having to initiate purchasing of long lead items far out in the project.
  • Use standard components where possible – Standard components can often be sourced of the shelf and make lead time much lower.
  • Make binding orders with your supplier – using purchase orders to ensure clear agreements with your suppliers will help you avoid miscommunication.
  • Confirm orders – make sure you receive order confirmations so that nothing falls in between
  • Track deliveries – track purchase orders until goods are delivered so that we know that you receive all items in time.

 

See also:
5 reasons to use purchase orders in your business

CostTracker is an easy-to-use purchase order (PO) system helping small businesses with purchasing and cost control. It offers several unique features designed for project-based companies. CostTracker helps hundreds of companies in more than 35 countries worldwide.

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